The Difference Between an LLC and S Corp | Mark J Kohler

Hey, Mark Kohler here, CPA and attorney helping clients around the country structure their businesses. Now I'm so glad you're watching this because you obviously must be interested in the difference between the LLC and the S Corp. Now there's a lot of videos out there and don't be tricked by the length of someone's video or maybe they've got a little sexier approach to something. I want to give you the cold hard facts on the differences and what time is the right time to set up the LLC versus the S Corp. Okay, now big picture, right off the bat, there's actually three ways I use an llc. And for those of you that have seen maybe my presentations before, you're like, Mark, I know where you're going with this. I'm not going to watch the whole thing. Tight. I want to try and wow you because these are, these are more technical reasons or ways you might use an llc and there's three of them. But big picture, I'm going to work on this left side, right side, kind of the standard use of an LLC or an S Corp and then go from there. Alright, left side, right side, here we go. Now on this side I have operations and then on the right side I have holdings. And I've got this kind of dividing line or veil for asset protection and a dividing line for tax planning. This would be ordinary income. This is ordinary meaning you're doing something that is transactional. You're selling a product or a service. This is more passive income. You're holding something long term and the assets doing the work for you. Now in a real estate context and this video is not all about real estate. Think of Chip and Joanna down in Waco, Texas on Fixer Upper. They're flipping homes. That's happening in less than 12 months. So it's short term in nature and in that situation we're worried about self employment tax. Big problem here when it comes to this side of the equation. There's a story and a moral to the story here in just a moment. Passive income is something you hold more than 12 months and again the assets doing the work for you. This could be interest points, dividends, capital gain appreciation, rent, long term holding type assets greater than 12 months and there's no self employment tax. That's good. The asset's doing the working for you, not you. All right, now that brings us to the primary reason for an S corporation, not a C Corp. Watch my other videos on C Corps. I'm not a fan, especially for the small business owner and I'LL go toe to toe with anyone that wants to talk otherwise. So we can figure that out later but just trust me on this. The S corporation is wonderful for this. Now it could be an LLC taxed as an S corp, I'll come back to that. But this is an S corporation for tax purposes. Money comes in, expenses go out. Profit. No self employment tax. What? No corporate tax and I'm saving money. No Obamacare and I'm getting the new 20% pass through deduction. This is beautiful. I get asset protection. I'm saving on self employment tax. Now the catch is I've got to take a salary but that and that W2 is part of this equation. I've got other videos out there on S corporations. It's really cool. Put in the word matrix, the Kohler matrix. It's not a movie. It's all about choosing the right salary. Good stuff. Articles, diagrams, all the good, the good things on saving on self employment tax. That's where we use an S corporation. There's no assets here. This is a business. Now maybe there's a forklift or some computers or some desks and all that but I'm not putting rental properties here or I'm not putting big time assets here. This is for operations to save on self employment tax. Boom. Now that brings me to the first reason to use an llc. The first place an LLC makes sense is for holding assets and we're all used to that. An LLC holds rental property. Boom. Ba da bang. It could hold investment accounts or some a farm, a ranch, some sort of asset you're trying to protect or something that has an asset that's creating passive income that you want to protect yourself from. See here you're trying to protect yourself from the tenant and you're also trying to protect the rental property from you texting and driving. So we got this armor here. States are going to have different rules. You got to study up on Copes. My book. Oh my gosh. Which book do I start with? The Financial Freedom Tax and Legal Playbook. I've got some excellent reading material in my books. Go over to Amazon for that. On this asset protection and where we go with this? This is a whole other world but it starts with this. And I'm going to put this in red. The first reason you might use an LLC is for holding assets for asset protection. Does an LLC save taxes? No. Now I want to repeat this for everybody out there because I don't care what you hear on other websites, I'll stand behind this till the day I Die. Unless the law changes, LLCs do not save taxes, period. People go, I got to set up my LLC for my business. What, you need protection? Cool. But it's not saving you taxes. Well, you go, well, Mark, my LLC is an S corp is saving me taxes, then it's not an LLC anymore. You made an S election. That, my friends, is the second reason we use LLCs is I might create an LLC, then tax it as an S corp. That's the second reason how an LLC can be used. Now, why I like this is because it gives us some planning opportunities. Number one, easy schmeezy, we're gonna maybe have one LLC for each rental, maybe one LLC for 20 rentals. All sorts of issues to consider there. And there's no perfect fit for every person out there. So be careful clicking on a website, you know the one I'm talking about, and just setting up an entity, get a consultation with a lawyer, hopefully with some tax experience, someone on my team would be a good fit. Or shop around that can explain this. And if they look like deer in headlights and you can explain this faster than your attorney, you got the wrong attorney. Now, last bit here. I want to just quickly wrap this up with the second and third reason and why I said this transition strategy from an LLC to an S corp is a planning opportunity is because, say you're starting out for the year. This would be example one. I'm starting out for the year and I don't know if I'm going to make enough money to make the S corp make sense or pay for itself. I love it when it does. In fact, I'm going to repeat this right now. Every dentist, doctor, engineer, attorney, accountant, plumber, electrician, contractor, all S corporations, realtors, brokers, orthopedic surgeons, we're all S corporations unless you're an employee for someone. But if you own your own business, that's where we run the S corp. But when you start your business, you may be like, I don't know if I'm going to make enough money to do this salary thing and yada yada. So we start out as an llc and then we go throughout the year and we go, oh, I'm making a lot of money. I can backdate my LLC into an S corp and there's a special revenue ruling that allows you to do it even near the end of the year. Don't worry about the 90 day rule. Your accountant should know what to do. So this LLC can be turned into an S corp. And that's that number two reason That I really like is I can start out with this LLC and then transition it. Another example would be some of you watching right now. You might be at the end of the year going oh my gosh, I'm going to pay way too much in self employment tax. The LLC is not going to save me. Can I backdate my LLC to the 1st of this year and start payroll now? Yes, and we do it all the time. It's legal, it's legit. And if your accountant out there is telling you you got to take a bigger salary, it's an audit risk, you may have the wrong accountant. For 20 years we have done thousands of S corp tax returns, thousands of payrolls for clients with S corporations, including my own for 20 years. And I put out my payroll matrix where we find a reasonable payroll level that's subjective. I'll give it to you, it's subjective, but you should generally have more profit than payroll. And I'm going to push the envelope until I'm okay with the irs. Please study up on my other videos and writings and blog articles and get a consultation. If your accountant is telling you that you can't save with an S corp, get a second opinion. I don't care if it's your brother in law or sister in law and you make them a spaghetti dinner when they knock it out on TurboTax. Wrong. You're losing money. Sorry, I got off on a rant there. Now the second that so the third. Sorry, I was going to say that second example is I can go back and backdate an LLC when you discover that the S corp needs to be there for you and to make sense. So anyway, that's that other example. Now I want to show number three of when this can make sense. So number three is, let's say you're in a partnership scenario and this is really straightforward. I've got an S corp, say my camera guy right there has an S corp and we're going to go import export trinkets from some country in the far east or somewhere. Well that's ordinary income. We're going to buy and sell a product. We may be doing a service, we may be who knows what, flipping a home. So if we're going to create ordinary income, what entity do we need? That's right, an S corporation. Well, I already have an S corp. I don't want another S corp. So my camera guy and me take our 2s corps and we set up an LLC for our partnership guys. I'm an attorney with a great team of paralegals and accountants. I only have 1s corp in my life. That's it, only 1s corp. It owns part of a firm over here, part of a project here, it owns a URL here, a DBA here, or whatever. I have one S Corp in my life where I do a significant tax planning, and then I own parts of other LLCs with other partners. That, my friends, is the third way you can use an LLC. And you want it. You want asset protection from your partners, but it's not same in taxes. It's a separate bank account, it's separate merchant account, a separate tax return. But together we create this LLC and our 2s Corps own it. All right, anyway, probably the video is longer than I want it to be, but this, this is the basics. These are really the issues you want to consider when you're trying to decide between an S Corp and llc. And please, I beg of you, be careful going out online and trying to just click a mouse. We literally have two paralegals. All they do is fix people's entities that they set up online, hoping to get it right. And we try to be affordable, Find someone that's affordable, that understands the tax and legal issues, that can help guide you through this selection. And then you're. Then you can maintain it, maybe do a little checkup once a year. I wish I could do plumbing. I go to Home Depot on the weekends, playing around in all the different aisles, having a good time. And then I come back to the house and jack something up. Then I call a professional on Monday and they chew me out for trying to do diy. Don't try to play lawyer on tv. Don't make the same mistake I do with plumbing. Get a professional, not even. I don't care if it's me or not. But get out there, just have a consult with someone or have someone separate, we said it entities in all 50 states for 800 bucks. That's it. And you get an hour with a real attorney on the phone, not a paralegal telling you what the attorney said or going through some script. So shop around, get some advice. Make the right decision between these two entities, and it will help you be more successful and make more money with your American dream. Thanks. Thanks so much for watching that video. And I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web, on Google, and trying to find answers to complex questions and just clicking a mouse, hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. Now click here if you want to be a part of my newsletter. It's awesome. Weekly updates and deadlines and strategies and tips. Also, subscribe to my YouTube channel. You'll love it. And make sure to click the bell icon so you get a little ping whenever there's a new video. And and finally, check out my site marjkuller.com with all sorts of videos, probably 70 plus videos, 30 plus hours of content that'll save you thousands of.