Yes, but not in the way that you think. There is a growing sentiment among popular online advice columnists and bloggers that LLCs can help you avoid a large amount of tax, and that therefore everyone should have an LLC, even if they are not running an actual business from the LLC. I receive numerous inquiries about forming an LLC for clients and structuring the best way to avoid taxes. In general, the structure of the LLC doesn’t affect the taxes that you pay, but rather the tax strategy that you might employ.
The idea of tax savings using an LLC seems to stem from the fact that you can, with certain structures such as those LLCs utilizing an S-Corp election, take advantage of the tax savings of “distributions” versus “salary”. The point here being that salaries are taxed higher than distributions of company profit to owners or members of the LLC, therefore, why wouldn’t you do this and save a boat load of money on taxes??
Two Reasons Not To Form an S-Corp:
It is complicated. Like, really complicated. If you make the S-Corp Election, you will now be filing a separate tax return for your business instead of your Schedule C, running payroll and withholding, and determining the numbers (how much will you determine is reasonable for a salary?). For the average individual LLC, the savings don’t even show up until you are making significant amounts of money. Larger corporations with multiple members and significant assets? Sure, the savings might start to show up on the balance sheets, especially when things like payroll and tax strategies are handled in-house.
2. Schedule C Deductions
You can generate significant tax savings through your Schedule C on your 1040 if you have an individual LLC without the necessary complications that go with an S Corp election. If you work with your accountant or CPA, you would be surprised at the level of deductions that apply to your business through an LLC structure that allows for it. Maxing out the deductions for your business and applying those principles going forward is a much more cost effective route to saving money on taxes than expanding into an S-Corp Election. Additionally, from speaking with other attorneys and accountants, the Schedule C deductions for business expenses draw much less ire from regulatory authorities than the LLC paying a $20,000/year salary and $100,000 in “distributions” on an annual basis.
Of course, there are countless success stories of people and businesses that have thrived under an LLC S-Corp structure and experienced significant tax savings because of that decision. The point of this page is not to talk you out of it entirely (I don’t give tax advice as a general rule), but to give you something to think about before jumping in with both feet because you saw a video on social media where a guy drew a chart that says you can save tens of thousands of dollars a year by making an S Corp election. Your accountant or CPA can usually run the numbers effectively on their end to see if an S-Corp elections will actually save you any money in the long run. Spoiler alert: it is generally not worth it.
If you are looking to form an LLC in Texas, Attorney Nathaniel Gilbert in San Antonio works with clients on a flat fee basis forming their Series LLCs, PLLCs, or LLCs. To learn more about LLC formation in Texas, Click Here. To contact Nate directly, Click Here.