L.L.C. vs. Sole Proprietor

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There are some theories that a sole proprietor with a large gross income, say $100,000 or more, is more prone to be involved in an audit than someone doing business as an S Corporation or a LLC. $100,000 is not a large gross income for a business entity. Therefore, the audit is less likely. I have seen IRS sampling statistics that show that a schedule C is much more likely to be audited than a partnership or S-Corp. This may be in part because Schedule Cs are more likely to be prepared without professional assistance and therfore more likely to have signifcant errors.

Even an individual without employees, if they choose to be taxed as an S-Corporation must pay themselves a reasonable salary for their services to the corporation and this means they must do payroll accounting and reporting. They also must pay unemployment taxes on the owner's salary. There is an exemption in California, however, that allows the employee-owner to be exempt from SDI if they file Form DE-459, Sole Shareholder/Corporate Officer Exclusion Statement. However, the advantage of the S-Corp tax status vs. the LLC status is the opportunity under the S-Corp to argue that some portion of the income comes from an investment in capital and employment of others and therfore is a return on your investment not subject to Self Employment tax. This game of the beat the SE tax works only after you have paid a resonable salary for all services rendered to the corporation.

Generally if the business involved renting real estate I put them in an LLC. If they are operating a business, I usually use an S-Corp.Mcewencpa


Can you tell me why you would put a rental real estate business in an LLC vs S Corp? or why not a Limited Partnership?

Posted by TaxManPlus at 3:34 p.m. on 3 June 2005.

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