two companies

by Mary
(OKLAHOMA)

A friend who is an accountant suggested we form an LLC and an S corp for our trucking business with 3 partners and one employee. Looking online I don't see the advantage of doing this except avoiding self emp taxes. Thank you

Answer

There might be a way to avoid some self employment taxes by shifting income to an s-corp.

The IRS requires that S corporations pay their owners who materially participate in the operating of the business a "reasonable" salary. Of course, you will owe self employment taxes on that reasonable salary.

In addition, remember that you lose flexibility with an S corporation in terms of allocations of profits and losses to owners/members. An S corporation is permitted only one class of stock.

If you distribute profits disproportionately between owners (for example, someone has 10% of the stock, but the LLC pays him 20% of the profits), then the S corporation will lose its status.

There are other restrictions on S corps involving the number and types of shareholders as well.

My suggestion is to hire an accountant to lay out an entire structure for your business. Relying on "cocktail party consulting", even if the person is an accountant, can be dangerous.