S Corps, LLCs, and C Corps - Choosing the Right Business Structure (Year-End Series)

Welcome to Accountants LawPod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhart.

Hello everybody, and welcome back to the podcast. We have a great subject today, but before we jump into that, I want to say hi to Lynda and Sarah and see how you guys are doing.

We're good. Sarah can't count. I'm in trouble right now.

Sarah can't count, she has a cold, she's got—

Yeah, there's a lot going on.

Let's call it this, for fuck's sake.

Love it.

Oh my goodness. I don't know, I was just messing around and then didn't work out and whatever, so.

You know, it's kind of weird because it's already like near the end of the year and it's like, what the heck happened? And I know I said that last time, but it's like, The, the months are going by fast. And I was in cycle, cycle class, spin class, and she's like, there's only 2 weeks to Thanksgiving. I'm thinking to myself, no, there's gonna be more than that. No, there's not.

Yeah, my sister-in-law sent me what she wanted me to bring for Thanksgiving dinner yesterday. I'm like, what? Isn't it, isn't it August?

Well, that's interesting because I was having the same similar conversation, but then I think my reality was when my son's like, oh, Mama, It's going to be 33 days before I head out of the country for my travels.

And I'm like, I want to go with him.

I want to go with him.

Although, you know, what season is it there? Oh no, that's a good season. He's going into the good season.

So yeah. Yeah. We were just trying to figure out the math of timing for phone calls and so forth. So it'll, it'll be interesting.

Timing is going to be rough and at least he'll be on the other side of the world. But I think at least He's got, I mean, he's young enough. There's so many things I'd like to do as an event for adventures there. And he's gonna, he's young enough to do them. I could just think about them like, oh, I'd like to jump, bungee jump off of a bridge or something. You know, wouldn't do it at my age, but.

I wouldn't do it at my age either, but yes. Yeah. I used to want to do that. Yeah. And yeah, but you know.

Now no.

I know. And as I—

I still haven't given up jumping out of an airplane. So that's coming one of these days.

Oh, you, Steve? I don't know when I'll do it.

I wanna do that. My dad says, why would you wanna jump out of a perfectly running airplane?

But you know what? Hopefully running airplane.

Yeah.

Not one that goes down.

Right, right. That's— yeah, exactly. Well, we should jump into our subject for today, speaking of jumping. But— and this is an appropriate one for this time of year because we're rapidly coming up to that time of year where this question comes up. And today we're going to talk about what type of LLC structures there are and the benefits of each one, the pros and cons and and all of that sort of fun stuff, because we get a lot of questions at the end of the year. And while we're not attorneys that can give that advice, even a lot of attorneys are asking us, what should I do? Should I switch from an LLC to an S corp? Or, you know, I have these partners and maybe I should be a C corp. And what does that mean? And, you know, there's a lot of, a lot of different nuances to it. It's not just a plug and play sort of thing.

So— And it's not something we can just generally ourselves feel comfortable answering, even though we're business owners. And we can speak from, but we do need the tax individual involved and the structure of your—

That's right.

It's a decision that's very thoughtfully, it is widely suggested on so many levels to do this, that, and the other. But when you have someone in tax helping you look through this other lens, there's a lot involved inside of that.

But Sarah, I gotta say, we've been in plenty of meetings where we're sitting with the client and we're going through their financials and we're looking at the, you know, the amount of money they've made. They started out small. And they're making money and that conversation we bring up.

Yeah.

Yeah. And we always divert it back to the tax professional, but we are the ones, I think we are the ones answering the majority of the questions there. And then all of a sudden it magically happens, but they're like, oh, I wonder why my tax guy or girl didn't tell me to do that. And then we're like, you really ought to consider it because it's going to be beneficial to you on the tax side if you do it. If you're at a point where you're making enough money that it makes sense to do it. And it's not a big deal. I mean, to go from an LLC to, you know, an LLC acting as an S, um, yeah, it's not a hard move. You don't have to change files or anything. It's not a big lift.

Exactly. I agree with you, Lynda. I do feel that we are often the ones— and, and here's a tip. I wish I had the— what's her name, the one that did the Novice Bewitched? Be witch, Samantha. That goes on. If you do, like you said, Lynda, if you make that switch, could you remember to tell us, please?

Tell us that you did it. Yeah. Because they don't say anything or they don't—

No one says anything.

Or they do it, but then they don't go and do the payroll. And then you're like, well, you have to do the payroll piece. And, oh, my tax guy didn't mention that, but he didn't do it. No. And you didn't do it. And now we have a problem.

Clarity. We need clarity here, friends.

Yeah.

Yep. But I will, Steve, you did bring up something I thought was interesting is depending on what you want to be is LLC electing us, if you're going to a corp, 'cause it's very rare that you have those corps in a certain size, but I have seen it and there are benefits to it and it has sometimes to do with the partners and their personal kind of what sort of deductions they, like a whole bunch of personal things that happen there.

Yeah.

All I'm saying is that I think between Lynda, myself, and you, Steve, we've seen a gamut of them.

Right.

This is not a conversation if you're waiting on the sidelines for somebody to bring up to you from a tax side. Sometimes it oftentimes will come from other people like us. We're just asking that you will go through a list today, but just take the extra step and have that conversation with your tax person or have your current bookkeeper or someone that is involved at that level to have that conversation with you with the tax. So there's an understood workflow and process change and how the books have to look and what organizational changes need to be made, what operating agreement needs to be made.

There's a lot. You do have to change that chart of accounts if the entity, entity changes. Some just the naming and, and the fact that how it's stated on the chart of accounts. And that's something that I think that gets forgotten. And then the payroll piece, I mean, setting up payroll is not like—

Like Samantha.

And it just happens. I mean, there's some work behind that, no matter what payroll product you pick. You know, I would keep it simple, stay with Gusto, just simple. You don't need to go fancy unless you have a need to go to like a Paychex or something. But I don't think you need to get too, too over the top with it. Get the basics down, but then now you can do a different 401(k) 401(k) offering or some of that's beneficial to the business.

And you know, that reminds me, I stumbled across this the other day. I did not know that Gusto had this, but behind the scenes in their different articles and FAQs, they have a whole article on what you need to consider when you change entity types. —and what you need to do in gusto. And I was like, oh, this is way cool. And I was reading through that. I'm like, this is going to be really helpful.

Yeah, there's a whole bunch of other things too that they've done in a product. If we just want to talk really, they've done a cool thing on the S corp product side with reasonable compensation salaries and so forth.

Yes, I love that.

And that's helpful too because that's a big question, right? What is reasonable salary?

What's reasonable? And I'm excited because at the front end of that, I was able to have some conversations with those PMs. So it's pretty cool to see how it's flourished and developed itself on that side. So, and the value of it because a lot of times those conversations are had somewhat siloed. So either the tax person's having it and then we have to interpret it, but that's not being directed right back at us in the right way.

Right.

And the individual who's, this recently happened, this individual is like, yes, I am an S corp. I'm thinking, okay, but I'm not seeing where payroll was coming in the books. And so Lynda and I were sort of— we asked the question back, well, then—

They had already changed?

They had already changed. It's just that the tax person was doing it in a different way, and it wasn't through— it was through their payroll, however they chose. If they had like a different in-house payroll system that they chose with like a Walters Kluwer or something like that, or, you know, a desktop, old profile. So it— what we weren't seeing it come in, we were seeing it get posted, but not posted maybe the way that we'd like to see it in the books. So Lynda and I had to really kind of like roll that one back, get them set up. And yeah, he was right in that he was set up on payroll. It's just understanding how— what that money that was leaving once a month really meant.

Mm-hmm.

And so now the clarity is coming in. Now he can see Oh, I see. This is my salary. This is what's going out the door and what is it being paid for? It's just before it was just a lump sum, I believe Lynda and I were seeing, right, Lynda? It was just a—

That's the other piece of it. So now, you know, you have to have payroll, make sure it's set up properly, get a good accounting firm to help you set it up right. Because if you don't have it set up properly, it gets booked all over the place and there's different styles. Everybody has different ways. But I can tell you, if you're a tax person, says to you, "Yes, you should have payroll. I'll just do it for you and we'll put it, book it in for you." Don't go with that deal. It's usually more expensive than hiring Gusto, and it's usually they don't get around to it. They're behind. You can't check your numbers. It's not a good method. I don't care what your tax person tries to sell you on. Don't go with QuickBooks Payroll. I used to love it. Intuit Payroll, used to love it. And now as you grow and you have employees in different places, you do not want to be in Intuit Payroll because there's too much of a manual lift. Sarah and I know this firsthand because we have employees all over the country and we can't be, oh, did you do the Georgia one? Or did you do the Washington one? Did you do— we can't, we don't have the capacity. And then in QuickBooks, when you're looking at it, even us as a professional, you read their information, it looks like it was filed. You see this report, you see all these things, and then you get a notice saying it was never filed. And Intuit made it look like they did something and it didn't happen. You don't want that either. That's why Gusto is much better. When it— she's finally got me as a believer in it because it's just not it's just not worth— it's too much of a lift on the, on the—

The headache.

That's a polite way to say it, Lynda.

It's way too much of a lift.

Yeah. Well, the other thing too, and I just— a quick note is if you are in the Intuit product, they don't produce the actual tax forms that are missing in a way that is easily seen. A lot of times you have to spend the time to call in to get those to be able to— and each state is different on how you file and So I honestly think if for us going forward, if you are in that Intuit product and we have to support you, there's got to be a monetary price change to us— Or change. —to our involvement. Or change to a different provider. It's just— it's been too much of a kind of clinching of like—

Just too many things. I know they're trying to make it better. They had a big announcement at their conference that they're going to add AI to it. But if the AI is anything looking like what it's been doing to the rest of the product, I don't want it in my payroll. That's too risky for me.

I really like Gusto. I do. I do.

So that's all they do, right? So it's kind of like, do I want to use Intuit's upload the bills and do the bills, or do I want Dext that's going to do that for me? That's all they do. Well, I guess they do more than that, but that's one of the main things that they do. And I think that when you're looking to invest in a product, does it have the bells and whistles? And does it have the— just for me, The fact that Gusto pays all the taxes and files all the tax returns, and I don't have to remember which ones aren't done by Intuit, that to me is just— that makes me sleep at night. I don't need to be getting letters in the mail every day.

Too many penalties.

Yeah, we pay too many penalties, and we're in a product that covers the penalties, but they don't cover the penalties. They don't give you money back. So yeah, it's a blocker.

Okay, well, I want to pull us back into the corporations.

Okay.

And what I want to talk about is specific scenario that I bet you guys have run across frequently. I'm an LLC. Mm-hmm. And I went to Gusto and I saw what reasonable salary should be. And I read that article and I did the whole bit and talked to my tax person, did everything right, okay? And I became an S corp. Two questions. And let me ask both of them right up front. When's the best time of year to do this switch over to an S corp? And number two, can I still take draws on that? Yeah. In other words, my, my S corp reasonable salary paycheck. But then I make enough money that I want to take extra money out as a draw. And how do I take care of taxes on that?

Well, on your second question, I would tell the client, do you really want to take a draw or why don't we just bonus you out and take the taxes so you're paying the taxes? Because otherwise you have to pay it. Great advice. Time.

I've run into this where they'll take a draw as well and then do estimated tax reporting.

That's fine. You can still do it, but I can't encourage you.

The answer is yes.

Yeah. I would encourage them to do the bonus and just take the bonus. I remember when I worked with the tax guy years ago and he said, you have to take reasonable pay. And when I switched over to an LLC from a sole prop, and then I was an LLC acting like an S, and I said, well, how do I know what to pay myself? And he said, well, you pay yourself what you can afford to pay. And I was like, well, that didn't help me much. And then he said, it's just pay yourself enough. And he kind of gave me an estimate and he said, at the end of the year, you're gonna be doing better than you expect. And then take a bonus at the end of the year and pay, take more out. But then you can always do that at the end of the year. You don't have to, or even quarterly, you don't have to. If you want to, you wanna make sure it's manageable. The IRS wants to see that. Paycheck regularity. They don't want to see you take a paycheck, skip a paycheck. That's not what they want to see. Then that's okay.

So let me ask you this, Lynda, with the, the quarterly example of taking a bonus. Am I going to take a bonus or I'm just going to take more pay? Because that's a loaded question. Am I going to take the bonus and pay more taxes on the bonus entry, or am I going to take it as regular pay? What's your, what's your feeling on that?

You got to look at it through the lens of where the income came from.

Yeah, is the income coming from regular customers you're going to keep having, then yeah, raise your pay. But if it's an oddball, say we got a big data migration and when we made $100 grand and then that's not going to happen again the next quarter, but I want to bonus myself out because now I've got cash sitting there, then maybe I want to just do the bonus and then see how the next—

And I can see certain law firms being in that scenario.

Yeah, you have your windfall moments. I mean, obviously, you're— as money's coming in, you're either saving or paying tax accordingly. There is a tap-out system. So for those high earners, there's only so much you want your books to bear on salary tax withholding and so forth. So you are going to have to presume you're going to pay estimates in addition to— you can't— there's a certain level, right, that, that strategically makes sense, and that's where the tax person comes in. But in the same token, if you didn't earn a lot of money in that first quarter and you, you couldn't— like, we have boutique firms that it doesn't make sense based on contingency style. You've had no salary in the first quarter because you really didn't have—

Right.

You had just had enough in savings to pay the bills. You didn't have anything to pay yourself. Okay, fine. Next quarter, maybe your windfall happens then. Let's get strategic. That can happen and that's okay. You just have to be okay with learning how to skip those payrolls so that those compliance reports are filed and that you're adhering to the structure that you agreed upon And you get, you know, once you're in these types of structures, if you really are not doing the right thing, to Lynda's point, if you're not doing the right thing and you have it taken away from you, or you don't hold, you don't have the paperwork to defend the fact that you did get approved for an S corp and so forth and so on. All of these little nuances that go on when you make these strategic decisions, you really have to take care of that data and make sure you're managing it well. It's not something that you just, I'm going to decide to do this and then don't inform anybody. And then you make the late election. And so you can take your distributions, you can pay estimates, you can have reasonable salary, you can do salary in a certain way. But all of this comes under the layer of compliance and strategic planning, every aspect of it.

Mm-hmm.

And so that, in that part of it, I think is a combination of who's supporting you on the accounting side and who's the tax accountant? That's the piece of it. And then you, of course, have your wealth in the middle. You have your investments, your 401(k), 401(k), your SEP, or other things. Those are all big picture pieces that all need to come together in one circle for that moment. So, Steve, there's, to me, it's like the vehicle for payroll is to have that salary and get those taxes paid in. Right? That's the vehicle. If you are above a certain salary, yes, you should be paying those estimates as well. Right? And take your— take your— do what you need. Take your draws, but make sure you're doing, like, to Lynda's point, the reasonable stuff on—

Exactly.

Yeah. Yeah. It's, it's a thing too.

I think, Sarah, with, uh, and Steve, I think with when they look at an LLC, a simple LLC, because a lot of the law firms are LLC. You might find that— RLLP— you might find that that money that the business makes goes, passes through to the personal return. And the S corp too. So the simple S corp passes through, whatever money I make in Artesani Accounting is now passed through into our personal return, unlike a C corp, which is a little bit different. And we don't see too many C corps with law firms. We don't. Really? I never saw that many before. I had one. One? You've had one?

I've had one. I mean, it was, I think at the time when it became, there was multiple reasons. It was a, you know, different structure and now it's evolved since, but to open to my eyes, it was a very great conversation. It was a legacy style firm. And honestly, Lynda, I was like, wow, okay, this is interesting. Listening to that tax person, and the way that she was giving advice as to why it was strategic to not move out of it because of the current C-Corp structure of tax rate to like going from like an S-Corp, right? Yeah. It was very fascinating and it had to do with the individual partners and how they were set up personally and what those tax implications meant. And then where they were structurally at that point of time and with a potential exit strategy of a buy-sell. It was the whole thing. I was like, wow, I've never— I've had a masterclass in this meeting. I've never heard that dialogue that way. And so that was really nice to hear. And it was— I mean, I would never have expected it to be a C-Corp. So I was like, oh, that's a whole bunch of you working.

The C-Corps I like is their tax return isn't until April, right?

Well, yeah, they're on the other— yeah, they're on the September. You get a free month.

Yeah. I think I only have one company that's a C-Corp, and I don't know why they're an HVAC company, but, you know, HVAC.

That makes sense because of the way the tax is. I mean, I know that it gets a bad rap for certain things structural-wise too. I know certain larger ones. This was not a large one by any means, but the tax rate was really critical to one of the partners. And so it made sense for the partnership to stay.

And then in that case, the business can pay the taxes because it owes the taxes.

Exactly.

And then the whole health insurance is different on there because that's the thing we see too with the LLCs and the S corps is that the client will write the check to pay the tax bill that's due in March and then, or April, and then that gets booked as a distribution. Because you just took money out of the business to pay your personal taxes because it passed through to your personal. So we get asked that sometimes, why is that in there? That was the business taxes and that was the business taxes that passed through to you. So it's, it's a distribution and that's something that can be confusing to, to our clients when they see that, although a C corp will come right out of the business.

Exactly. The structure is interesting too, because it takes for the books a little bit of a difference in your mindset because you have to be really careful about what you're doing in that equity section, which is not the same.

Which is wrong in every file we get about 99.9% of the times. Once in a while we'll find, oh, this is, this is set up. Somebody must have known what they were doing. 99% of the time I see owner's pay and expenses. And it's like, it's a, it's set up for a sole proprietor and it's not set up properly. That's one of the things when we do the, do the chart of accounts to make it better, we—

Right.

More law specific. We actually make it structured to their entity, which is something else.

Well, to Sarah's point that she mentioned, excuse me, earlier about having to redo the operating agreement and the, you know—

Yes.

All of that. Because if you're a corporation, you've got to have, to stay in compliance, you've gotta have, if you will, a board of directors, and you've gotta have regular meetings and all that. If you're audited, you wanna prove that you've had regular meetings and you've documented decisions that have been made and all those sorts of things that are required of you to do. There's a lot more paperwork involved with a corporation than there is with an LLC.

Mm-hmm. And you really should look at your operating agreement once in a while. Like Sarah and I had a simple one in the beginning and then we made it more complex as the business has grown. But we try to cover—

I'm complex now.

We try to cover all the bases. What if, what if, what if? It's just like writing a will. What if she dies first? What if I die first? Where does the money go? Where does the business go? You wanna make sure you're protecting the other partner and those things are really important. And the bank wants it too.

Key person insurance. Um, this is why you've heard me talk before about the importance of budgeting every year and having an exit strategy that you review every year. And all that— those two things flow into your operating agreement.

Have you ever had to tell a lawyer that they need to— you ever ask them about your key man insurance? You have your key man insurance? Do you ever ask?

Oh yeah, sure. Yeah.

What's that?

Yeah. The other thing I, I do Feel that we've seen just kind of through the, through the years of doing this is the way that people hold potential partners that come into the business and/or non-equity partners, depending on your structure and how that gets set up. And it's fascinating to me how incredibly fast and quick this moves without dialogue to people like us and that equity equity section. Again, there are changes, but then the tax changes. But then you have all this complex stuff on the other side where it's— you're an LLC electing S and you have a whole bunch of health insurance that now needs to make sure it's on your W-2. If people are doing an HSA, you have to have that conversation of what that looks like because it does tell you about FSA, HSA for 2% shareholders. There's like a whole list of things that happen there in addition to the key person insurance and all the other stuff.

Well, that's the thing too. Go look and see where they're putting your healthcare because you're gonna get a W— you should be looking at it now or at the end of the year. You wanna give that little heads up. This is what we have with your, even with your employees, your team. This is your address, this is what we have. And then make sure that that's stated properly because that's one of those things that might be just thrown in one bucket. And then at the end of the year, you're having to make an adjustment to so that the W-2 is stated the right way.

Yeah, it's like I always say, it's not the flip of a switch. There's a lot that goes on with it. There's a lot of pieces to it to support you. And I do think, Steve, to your point on the exit strategy, is also the scalability side of it too. And what is, like if you wanna scale, how are you set up? Does it work? Does it meet your needs? If you have certain wealth plan offerings, are those still gonna work when you scale with more employees? The whole— there's a whole bunch.

Well, with the 401(k) 401(k) plan, highly compensated employees being the owners and what percentage that they can put in or the dollar amount that they can put into the plan and not violate the IRS rules on fairness in the 401(k) 401(k) plan and what that means. And there's a lot of things. And, you know, not to scare everybody, but that's why you have us and that's why you have your tax preparer and that's why you follow these processes and steps to consider and make these changes when you think you're ready. And, you know, to your point earlier, Lynda, working with that tax person or the CPA all the way through so that it's not just a year-end Friday afternoon after Christmas discussion. Are we going to change on January 1st? You know, plan ahead.

I mean, we're checked out. Like, I'm not—

never mind checked out, burnt out. I know it's, it's so true, but this is the time you want to talk to your tax people too.

Right now.

Yeah, right now they're not as busy. This is time. Don't— every time I talk to somebody and they're like, they don't like their tax person, why they don't respond. Well, when are you talking to them? February, March, April. Well, they're busy. October. Yeah. Yeah.

You know what I'm doing right now? I'm putting it on my calendar and I'm sending an email.

We caught you, Sarah.

I mean, I want it this— I'm more than ever this year, um, because I And to the point is we have this BBB coming up for 2026, and a lot of those tax changes are going to happen. What does that look like? We don't know.

We don't know.

Oh, also, a lot of times with your S corp people, and I mean with your LLC people or partnership people, they take and they start another little firm over here for their own personal, and they do a little S corp here with payroll. That's all it is really, is S corp payroll. And then they fund out of their business into there and then pay themselves a payroll, which is paying the taxes and putting money into Social Security and all the things, all the things that doesn't happen if they're just taking draws all year.

Sometimes too, one thing I should add is depending on how your current firm you're with your partners, how you want to pay each other out. If it's not, if it's a convoluted, non-equal style and you're not okay with Changing pay because you have to have equal distribution. So if you're not okay with having payroll be up and down depending on the partner, you may need to look at your current structure and say, how are we honoring this S corp, LLCs? Do we need to go back to a partnership, non-S, and then restructure ourselves? Again, more tax planning strategies. And how does that look? Because each one of you that's a part of that needs to have that whole conversation because you all have your own separate lives. You have your lives. Yeah. Life. And ultimately, we're serving the business and serving you all. But what does this look in totality? So I— there's— I've seen so much go through and change. And I personally, I don't have an opinion one way or the other. I just want to make sure we're included in the conversation is the biggest thing I want to make sure of, right? Yeah, just so we can help you. So—

Who has a headache?

I know we probably scared the heck out of a lot of people, but hopefully we started some good conversations. And maybe we, if we could just hope that somebody listening says, I'm going to call my tax person right now and get that stuff.

Right there, we did our job.

We did our job, right? Yeah.

Or just start the conversation as a business owner to business owner. We can't give tax advice, but as business owner to business owner, this is our understanding. This is what we, if we're set up that way, we can answer questions as a business owner but we don't know your whole story with your personal side either. So yeah, it's kind of a good—

Yeah, and don't go to AI and say, what type of corporation should I be? Please don't do that. It's not there yet.

It's not there yet.

Yeah.

I'm going to go ask right now.

Are you? You're going to see what it says?

Why am I waiting?

Thank you. Thank you. Thanks, everybody.

Thanks, everyone.

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Well, everybody, thank you so much. I hope that this was enlightening. We hope it was enlightening for you.

Yeah.

And—

Yes. We're passionate about it, as you can tell.

Thank you so much. Have a great week, everybody.

Bye. Bye.