I currently have an S-corp for a entirely different business from cakes. I'm getting ready to get all set up and licensed for my cake business, but I wonder if having a separate LLC is a better idea for the cake business. My accountant said I could have mulitple businesses under my S-corp and I'm going to ask her specifically about a cake business under this, but I just wonder if anyone has any expertise in this area on if LLC is better for this type of business than an S-corp is. TIA!
The fact that I have absolutely no idea what you're talking about makes me extremely nervous about setting up my business. I have so much to learn. I find the 'business' part quite intimidating.
I really hope someone can answer your question. I will be watching too!
I used to work for a family-owned manufacturing firm. They had an umbrella company and then all other companies were sub-companies owned by the umbrella or the parent company.
So based on my experience, I formed an LLC and my catering and cookie companies are dba's under the LLC. The reason I moved from sole prop to LLC is because I have some projects in the works and wanted one management company to run all the legalities thru .... I want separate company names but not separate books, so to speak.
YOu might touch base with your attorney. An accountant's advice is credible, but there might be legal reasons that you should or shouldn't do something.
I've done accounting for years and still am confused about the differences between an LLC and a sub-S corporation. Since we created our business, we felt going the LLC route was better because we could easily prepare the business taxes and file the partnership forms before doing our own personal taxes rather than dealing with the stock issues with a sub-S.
I'm still confused---even as I write this.
Paul (& Peter)
We had a salsa business as an S-Corp. and it's not really that much different than an LLC as far as I recall. The S-Corp. allowed us to file one tax return and not get double-taxed on income. There's a little bit of protection for your personal assets with an S-Corp, should someone sue the company, but it's not total protection.
You might go to legal zoom dot com and look them both up and see what it says. I hear advertisements all the time for that website and it's supposed to be able to explain the legal aspects of starting a business. I would think they could offer info on this.
I'll apologize up front for the length of this. As a tax preparer, I hope I can help with your tax questions.
From a tax standpoint, the LLC is the more flexible option because an LLC can elect how they want to be taxed. They can be taxed as a sole proprietor (if it has only one member), a partnership (if it has two or more members), a Subchapter "S" Corporation, or a regular "C" corporation. Therefore, under an LLC you can have your liability protection without significantly increasing your bookkeeping activites and tax preparation bills by retaining your "sole proprietor" tax designation if you are the only owner. However, keep in mind that when you make a profit on the business, it's subject to the rather hefty self-employment tax in addition to income tax.
A corporation only has two options on how it wants to be taxed - either as a regular "C" Corporation or as a subchapter "S" Corporation. A "C" Corporation pays taxes itself on its earnings while an "S" Corporation passes the earnings through to its owners eliminating some of the double taxation problems associated with the "C" Corporation. While the earnings of either type of corporation are not subject to self-employment tax, owners of either type of corporation are expected to set-up payroll for themselves, withhold all applicable taxes, and file all payroll-related tax returns.
In spite of all these wonderful tax considerations, the real difference between an LLC and a corporation (whether it be a regular corporation or an S-Corporation) is a legal distinction. The specifics can vary by state, which is why Legal Zoom is a great place to do research, but where I work, we almost always tell people to go to a local attorney who is familiar with the state laws.
Feel free to e-mail if you have further questions: [email protected]
Wow, thanks for the detailed response, taxnerd! (love the name btw ) That's some really great info. I'll look in my phone book and see if I can find a tax attorney to ask some of these questions to as well as talk to my accountant again about the specifics of both.
I'm had my S Corp since 1992 - before LLCs were approved in my state. I have several businesses as dbas and assumed names under the S corp. The taxes are reasonably easy.
I ended up on an email mailing list from an attorney's firm and ironically, the first issue was about LLC's vs. S corp. Here's a cut-n-paste from the info-email that I thought might be helpful. Understand this is from an Indiana Attorney and you should always check with your own attorney to see what works best for you in your state.
Personal Liability for Company Debts
Both owners of an LLC, called members, and owners of an "S" Corp, called shareholders have limited liability. Generally, they are not personally liable for the debts of the company. Exceptions arise when corporate formalities are not followed or if an individual personally guarantees the debt of the company.
LLC's are easier to form. To form an LLC, one must file Articles of Organization and pay a filing fee to the Secretary of State. While not required, it is a good idea for LLC members to enter into an Operating Agreement. An Operating Agreement sets out, among other things, how the LLC will be managed and how a member interest may be transferred. To form an "S" Corp, you must file Articles of Incorporation and pay a filing fee to the Secretary of State. Bylaws, containing provisions for managing the business and regulating the affairs of the corporation must also be adopted.
"S" Corporations are required to have a formal annual meeting and have record-keeping requirements that LLC's do not. An "S" Corporation must issue shares of stock as evidence of ownership. LLC's do not issue stock.
Distributions of Profits and Losses
With an LLC there may be different classes of membership. LLC members may split profit and loss in any way they choose (provided IRS guidelines are followed). "S" Corporation profit and loss may be allocated only in proportion to each shareholder's interest in the business.
There is no limit to the number and type of members who may own an LLC. For example, an individual or another company may be a member of an LLC. In comparison, "S" Corporations are limited to a total of 100 shareholders, all of whom must be individual United States citizens or permanent residents.
LLC's can be managed by all members or a designated manager. "S" Corporations are managed by Directors and Officers.
Unlike a "C" Corporation where the entity is taxed on reported income or loss and the shareholder is taxed on dividends received, both LLC's and "S" Corp's provide "pass through" tax treatment; meaning that income or loss from the entity passes through to members/shareholders. There is no double tax. LLC owners may pay more in self-employment taxes than "S" Corporations because 100% of LLC members' earnings will be subject to tax, including profits. With an "S" Corporation, shareholders only pay self employment tax on income received as compensation for services, not on profits that pass through.