Legal Question in Business Law in New York

Re: Is it true that if I'm an S-Corp....

In my opinion, these are fiscal/tax questions and are more appropriately addressed to an accountant or tax specialist.

Good Luck

RRG

Re: Is it true that if I'm an S-Corp....

Not an easy question to answer, and you appear to be somewhat confused by the payroll consequences of both entities. As an "S" employee, any wages you pay yourself are subject to both employer/employee social security, at the combined rate of 15.3%. As a sole LLC owner, the rate is less than 15.3%, as you only pay on 90% of your net profit as a self-employed person, not 100%. The real question is what portion of your "profits" is to be considered wages? In a service business, traditionally 100% of profits are considered as your wage/salary, even if the amount exceeds what would be the prevailing wage. On the other hand, if part of the profits are attributable to capital assets, like machinery and equipment, some portion of the profits could be considered a fair return on the value of the equipment necessary to conduct the business, and be eligible, as you describe, to be considered as a dividend, not wages. For example, as an attorney, all of my income is considered to be self-employment income, whether I practised as an "S" corporation, a LLC or purely as a sole proprietorship. On the other hand, if I were in an equipment-leasing business, part of my profits would not be subject to social security, since the profits would, in part, be attributed to my capital invested in the equipment I leased. What is a fair allocation is somewhat arbitrary since I am entitled to a fair return on my investment, and I am also managing the business and entitled to a fair wage for my services. The real problem occurs where the extent of profits exceeds both the prevailing wage and a fair return on my investment. While I might consider anything over prevailing wage to be attributable to my capital investment (and consequently not subject to social security payments), IRS might argue that I am only entitled to a fair and reasonable return and that any excess should be wages.

Re: Is it true that if I'm an S-Corp....

With regard to a portion of your question, any dividend paid out by an S-Corp. is not "tax free." It would only be spared the corporate income tax at the federal level and potentially all or a portion of corporate income tax at the state and municipal levels. New York is a good example of these various taxes at work in such a scenario. One route to avoid corporate tax as a shareholder in an S-Corp is to derive a salary from the S-Corp. However, the S-Corp as an employer may be subject to another array of taxes, including payroll taxes. It's not a simple and clear cut matter. The reality is that S-Corps paired with good accountants offer more sohisticated and tax effective transactions (e.g. those involving real property) than the LLC. However, the LLC is easier to operate and manage from both a tax and corporate formality perspective. If you are a one man show within a service based industry that invites liability, an LLC is often, in my opinion, the better choice.

Hope that helps,

Kaiser Wahab