Tax Jargon – Isn’t My LLC Already an S Corporation?

You did it, you set up your own limited liability company in your State.

You are excited, you are the sole owner, you get the Articles of Organization, you get the Federal Employee Identification Number (EIN), you setup the bank account.

What now?

If you are talking about taxes, nothing really.

As a sole proprietor (meaning you are the only one owning the company), all of your income and expenses are reported on your PERSONAL INCOME TAX RETURN (otherwise known as FORM 1040).

The income and expenses are reported on Schedule C – Profit or Loss from Business.

First question you may ask, but I have an EIN – you do, but your income and expenses are still reported under your social security number for TAX PURPOSES.

You can see on the Schedule C, Line D, the EIN should be placed as well. In a perfect world, your tax accountant would “Footnote” your personal income tax return to state that you have an entity (an LLC) which is DISREGARDED for IRS tax purposes.

A little background FEDERAL vs STATE:

1. For STATE purposes, you can be a partnership, corporation, joint venture…etc.
2. For FEDERAL purposes, you can only be a corporation, or a partnership if more than two owners, if not you are considered a disregarded entity. Additionally, you can choose through an election to become an S Corporation, which is ONLY A FEDERAL distinction. You can be an LLC and also at the same time be an S Corporation, or you can be an LLC and be disregarded.

Alright, back at it. Your net profit (or loss) as determined on Line 31 (this is 2019 Forms), is then carried forward to Schedule 1 and Schedule SE of your Form 1040.

It is important to remember that the Form 1040 is basically two primary pages, and then a bunch of Schedules and Forms behind it which complete the filing.

You only would need certain Forms dependent upon your certain circumstances. As a sole proprietor, all of your net profit is subject to self-employment taxes – when you start making good money, this is when most accountants start the talk of moving to an S Corporation.

The function of the S Corporation is to shelter some of your net profit from being subject to self-employment. By being required to pay yourself a reasonable salary – more on this later – you essentially become an employee of your own business.

Thereby, you jump from reporting on Schedule C to reporting on Schedule E – I know confusing, but frankly, you don’t need to know! Whatever amount of BUSINESS net profit you earn (after your salary) is only taxed at your MARGIN RATE, not with an additional 15.3%. It matters. It is important and a savvy way to reasonably adhere to the tax authorities.

 Let me know and I can run some calculations.