Why S Corps are Better Than LLCs — Transcript

Full transcript

1. 0:00Most entrepreneurs form an LLC and then
2. 0:02they assume that they're all set.
3. 0:04Carlton, I got my LLC, I'm good to go,
4. 0:05right? Many do not realize that when
5. 0:07your business is taxed like an LLC, you
6. 0:10give up a lot of money. In this video,
7. 0:12I'm breaking down why S corporations can
8. 0:14be far better tax efficient wise than an
9. 0:16LLC structure in certain circumstances.
10. 0:19So, if you're somebody that's making
11. 0:20over a 100 grand, you're going to love
12. 0:22this video. Without further ado, let's
13. 0:23dive in.
14. 0:27All right, guys. Let me tell you this
15. 0:29$100,000 mistake. If you make the wrong
16. 0:31choice between when it comes to LLCs and
17. 0:34S corporations, it will cost you
18. 0:36thousands of dollars in taxes and I've
19. 0:38seen it every single year. In fact, when
20. 0:41you consider that you can end up
21. 0:42overpaying on your taxes by 10, 15,
22. 0:4520,000 all from simply making an
23. 0:47election or not making election, this is
24. 0:50catastrophic. Now, I don't know about
25. 0:52you guys, but I hate losing money and I
26. 0:55hate missing out on opportunities to
27. 0:57grow my wealth. As a matter of fact, me
28. 0:58and my wife have this pact. We're going
29. 1:00to always make sure that we're making
30. 1:01smart decisions together to grow our
31. 1:03wealth in 2026 and beyond. So, to help
32. 1:06you understand why choosing the wrong
33. 1:07entity structure can be so costly, let's
34. 1:09first talk about the shortcomings of
35. 1:10LLCs. Then, I'll explain how we can use
36. 1:13S corporations to overcome them and then
37. 1:15I'll show an example of how S
38. 1:16corporations can actually save you
39. 1:17money. Are you ready? All right, guys.
40. 1:18First things first, we got to get it out
41. 1:20of the way. If you're new to this
42. 1:20channel, I need to teach you what an LLC
43. 1:22is. So, if you're somebody that's
44. 1:23experienced, hold on a second. An LLC is
45. 1:25a limited liability company. It's a
46. 1:27business structure that you can set up
47. 1:28in the United States. It combines the
48. 1:30best features of corporations with sole
49. 1:32proprietorships or partnerships. Now,
50. 1:34the primary benefit of an LLC is limited
51. 1:37liability protection, which means the
52. 1:39owners, called members, are generally
53. 1:41not personally responsible for the
54. 1:42company's debts or legal obligations.
55. 1:44Now, [music] this separation helps
56. 1:46protect your personal assets, homes,
57. 1:48cars, savings accounts, if a business
58. 1:50has a lawsuit or comes into a financial
59. 1:51problem. Now, another key feature of an
60. 1:53LLC is it has flexible taxation. When it
61. 1:55comes to an LLC, by default, you are
62. 1:58taxed as a sole proprietorship if you're
63. 1:59single member LLC. If you're a
64. 2:01multi-member LLC, you are taxed as a
65. 2:03partnership, meaning the profits will
66. 2:05pass through to your individual tax
67. 2:07return. That's all you need to know.
68. 2:08Now, this structure makes LLCs a very
69. 2:10popular choice. Why? Because it's so
70. 2:12easy. You get the legal protection and
71. 2:14then everything files inside of your
72. 2:16personal tax returns. Your business
73. 2:17doesn't pay taxes. But, who are LLCs
74. 2:20really for? LLCs are commonly used by
75. 2:22small base business owners, freelancers,
76. 2:25consultants, online entrepreneurs, and
77. 2:28real estate investors. Because real
78. 2:30estate investors also need liability
79. 2:31protection while maintaining operational
80. 2:34flexibility. Many people form LLCs when
81. 2:36launching businesses in the marketing
82. 2:38space, in the e-commerce space, in the
83. 2:40coaching space, but the structure is
84. 2:42appealing to new entrepreneurs because
85. 2:45it's so simple to form and manage.
86. 2:49Hopefully, you're starting to catch on
87. 2:50to why this structure might be the one
88. 2:53that you don't want to stay in too long.
89. 2:54LLCs are suited for business owners who
90. 2:56want to separate personal and business
91. 2:58finances. Love that, by the way. But,
92. 3:00startups and side hustlers, when you're
93. 3:03in an LLC in your first couple of years
94. 3:05in being in business, what typically
95. 3:07happens? You have operational expenses.
96. 3:09You're opening up bank accounts for the
97. 3:11very first time inside of your business
98. 3:12name instead of yours. You're
99. 3:13establishing credibility with your
100. 3:14customers and you're also just paying
101. 3:17for things in order to eventually become
102. 3:19a profitable business. You're wearing
103. 3:21your first suits for the very first time
104. 3:22with your name on them or your logos on
105. 3:25them. Your car might even have your
106. 3:27logo. You're branding things. Before we
107. 3:30move on, if you make at least multiple
108. 3:32six figures and your tax strategy has
109. 3:33not evolved, your income is being
110. 3:36subject to over taxation. There's a good
111. 3:39[music] chance you are overpaying and my
112. 3:41company Tax Alchemy would love to work
113. 3:42with you to do something about it. We
114. 3:44work with high income earners just like
115. 3:45you to implement sophisticated IRS
116. 3:47compliant tax strategies that can
117. 3:49legally reduce your tax bill by 50, 80,
118. 3:51even 100% if you follow the rules
119. 3:53correctly. [music] If you want to find
120. 3:55out what that could look like for you,
121. 3:56click the link in the description below.
122. 3:57We'd be more than happy to schedule a
123. 3:59call with you to go over the options
124. 4:00that you have available. Now, back to
125. 4:02this video. But, here's where the
126. 4:03shortcomings start to happen with the
127. 4:05LLC. Despite their benefits, despite
128. 4:08their simplicity, LLCs have some tax
129. 4:10related limitations, especially as a
130. 4:12business becomes more profitable.
131. 4:14[music] By default, a single member LLC
132. 4:16is treated as a disregarded entity,
133. 4:18meaning all the profits pass directly to
134. 4:21the owners and are reported on a
135. 4:22schedule C of the owner's personal tax
136. 4:25return. For 2026, self-employment income
137. 4:28is generally subject to 15.3%
138. 4:30self-employment tax, which includes
139. 4:32social security, 12.4% and Medicare,
140. 4:352.9%. Remember those percentages. Now,
141. 4:38it only applies to the first $184,500
142. 4:42while the 2.9 Medicare portion applies
143. 4:44to all net earnings with no upper limit.
144. 4:47Ah, that's tough. Now, there's also this
145. 4:49extra 0.9% of additional Medicare tax
146. 4:52that applies to self-employed income
147. 4:54that's over 200 grand. So, if you're a
148. 4:56single filer, you're a head of
149. 4:57household, or you're a qualifying
150. 4:58surviving spouse, 250,000 is for married
151. 5:02couples. 200k is for you. If you're
152. 5:04married filing separate, it all drops
153. 5:06all the way down to 125. Now, that
154. 5:08additional Medicare tax is assessed only
155. 5:10on the amounts of income above those
156. 5:11thresholds and if both wages and
157. 5:13self-employed income are present, the
158. 5:15threshold for applying the tax to
159. 5:16self-employment income is reduced by the
160. 5:18amount of wages subject to that
161. 5:20additional Medicare tax. Stay with me
162. 5:23now. Let's illustrate this in real life.
163. 5:25Considering you're an LLC owner, let's
164. 5:27say you're earning $150,000 in net
165. 5:29profit with 92.35% of that income
166. 5:32subject to self-employment tax, meaning
167. 5:33about $138,525
168. 5:35is subject to 15.3%. That means $21,200
169. 5:38in self-employment taxes is gone before
170. 5:41federal and state taxes. Even after the
171. 5:43partial deduction that I gave you of the
172. 5:45one half of self-employment tax, you
173. 5:47still have a significant tax burden. And
174. 5:49as profits rise further, the difference
175. 5:51between more noticeable and difficult to
176. 5:53deal with becomes very obvious. Now,
177. 5:56let's talk about S corporations. An S
178. 5:58corporation is not a separate type of
179. 5:59business entity, but rather a tax
180. 6:02election that is available to eligible
181. 6:05businesses such as LLCs or C
182. 6:07corporations. You can choose to go in
183. 6:09one or the other way. By filing the
184. 6:11appropriate election with the IRS, a
185. 6:13business can choose to be taxed under
186. 6:15subchapter S of the Internal Revenue
187. 6:18Code. LLCs and S corporations generally
188. 6:21are considered pass-through entities,
189. 6:22meaning the company itself does not pay
190. 6:24federal income tax. Instead, profit and
191. 6:27losses pass through to the owner's
192. 6:28personal tax returns. This avoids the
193. 6:30double taxation that applies to
194. 6:31traditional C corps where profits are
195. 6:33taxed at the corporate level and then
196. 6:35again distributed as dividends. Here's
197. 6:37one key feature of S corps that most
198. 6:39people just aren't [music] aware of.
199. 6:40It's how you get compensated. Owners who
200. 6:43actively work in the business must pay
201. 6:44themselves a reasonable salary, which is
202. 6:46subject to normal payroll taxes. That
203. 6:49social security that we talked about
204. 6:51earlier and that Medicare tax. Yes. And
205. 6:53any additional profits that can be
206. 6:55distributed to the owner as dividends,
207. 6:57which are typically not subject to
208. 6:58self-employment taxes. This structure
209. 7:00creates tax planning opportunities. Why?
210. 7:02Because anything that is distributions
211. 7:05is not subject to social security and
212. 7:07Medicare tax. Who should these S corps
213. 7:09be used for? S corporation taxation is
214. 7:11generally most beneficial if you're a
215. 7:13small base business owner and your
216. 7:14company is profitable and you want your
217. 7:16profits to be retained, which means
218. 7:18you're okay giving yourself a salary out
219. 7:20of your own business and leaving the
220. 7:22rest as distributions or profit. For
221. 7:24example, if your business earns $120,000
222. 7:27per year and you take out 70 grand, the
223. 7:29remaining 50k can be taken as a
224. 7:31distribution or you can leave it in the
225. 7:33business, but it won't be subject to
226. 7:34self-employment taxes. That's right.
227. 7:36[music] So, the owner can reduce their
228. 7:38total payroll tax burden compared to
229. 7:40being taxed on the entire income.
230. 7:42However, S corps are not ideal for every
231. 7:45business. They come with additional
232. 7:46compliance requirements including
233. 7:48running payroll, filing corporate tax
234. 7:50returns instead of just a single member
235. 7:52LLC return, maintaining corporate
236. 7:54formalities such as your meeting
237. 7:55minutes. Plus, to qualify, the business
238. 7:57must have 100 or fewer shareholders. All
239. 8:00shareholders must be United States
240. 8:02citizens or residents and the company
241. 8:03can only issue one class of stock. So,
242. 8:06for early stage businesses with minimal
243. 8:08profits and fluctuating income, the
244. 8:10administrative costs may outweigh the
245. 8:12actual tax benefits. But, S corps can be
246. 8:15advantageous compared to LLCs primarily
247. 8:18because of how self-employment taxes are
248. 8:20handled. That self-employment tax, that
249. 8:2215.3% that we always talk about, it
250. 8:25covers that social security and
251. 8:27Medicare. You know, as businesses grow,
252. 8:29this tax can become substantial. 15.3%?
253. 8:32That's a lot. So, with an S corp, only
254. 8:34the reasonable salary is subject to
255. 8:36payroll taxes while distributions are
256. 8:39exempt from those taxes. Ah, that's
257. 8:41amazing. This can potentially save
258. 8:43business owners thousands of dollars
259. 8:45annually. Now, one thing to take into
260. 8:46consideration is that reasonable salary
261. 8:48I talked about. IRS does require the
262. 8:51amount you pay yourself in salary to be
263. 8:53reasonable and comparable to what
264. 8:56someone else would be doing the same job
265. 8:57in your field might make. Another thing
266. 8:59to mention is with the S corporations is
267. 9:01that it provides a clear structure for
268. 9:04separating salaries versus profit and
269. 9:06then reinvested earnings, which can be
270. 9:08useful for financial planning and
271. 9:09scaling your business. While LLCs are
272. 9:12simpler to operate and offer great
273. 9:13flexibility, S corp taxation may provide
274. 9:15meaningful tax efficiency for profitable
275. 9:17businesses. And for many entrepreneurs
276. 9:19that are profitable, the strategy is to
277. 9:21start an LLC for simplicity and then
278. 9:23later elect an S corporation. You can
279. 9:25file that documentation at any time in
280. 9:28the year to lock in your S corporation.
281. 9:30All right. Let's go over the example. An
282. 9:32entrepreneur who runs a marketing
283. 9:34consulting business structured as an LLC
284. 9:37earns $190,000
285. 9:39in net business profit. They're under
286. 9:41the LLC tax treatment, which means the
287. 9:43entire 190 is subject to the 15.3%.
288. 9:4612.4% is social security and 2.9%
289. 9:49Medicare. Although only 92.35%
290. 9:52of the income is considered taxable for
291. 9:54the calculation, it still means that
292. 9:56approximately $175,465
293. 9:59is subject to self-employment tax. The
294. 10:00resulting self-employment tax bill would
295. 10:02be roughly $26,846
296. 10:05before factoring in federal or state
297. 10:07taxes, before federal or state taxes.
298. 10:10Now, imagine the same entrepreneur
299. 10:11elects to have that LLC taxed as an S
300. 10:13corporation. They give themselves a
301. 10:14salary of 90,000, which is subject to
302. 10:17social security and Medicare tax. Now,
303. 10:19their payroll tax on that salary is
304. 10:21$13,770,
305. 10:23split between employer and employee
306. 10:25portions. The remaining $100,000 of
307. 10:28profit is taken as a distribution, which
308. 10:30is still subject to income tax, but not
309. 10:32self-employment tax. So, by making this
310. 10:34election, the owner reduced the amount
311. 10:37of income exposed to 15.3%
312. 10:40and saved taxes roughly $13,000 in
313. 10:43payroll taxes. They went from $26,000 to
314. 10:45$13,000 in total self-employment taxes.
315. 10:48This generates a huge tax savings in the
316. 10:51first year of doing this, showing you
317. 10:52how profitable business owners can
318. 10:54actually be when they make a sub-chapter
319. 10:56S election. You're probably wondering,
320. 10:58"Okay, this is cool. When do I make the
321. 11:01switch, Carlton? There has to be a magic
322. 11:03number for my business." And the right
323. 11:05time to consider switching from an LLC
324. 11:06to an S corporation is a mathematical
325. 11:09equation, but it's also a question and
326. 11:11answer that we have to get back from you
327. 11:13around what is your intentions with your
328. 11:15business. For some business owners, they
329. 11:16might be looking to sell or exit out of
330. 11:18their businesses, which means we might
331. 11:19want to be inside of a C corporation
332. 11:21instead of an S corp. For some business
333. 11:22owners, they're doing real estate, which
334. 11:24means we would never jump to an S
335. 11:25corporation if they're doing real estate
336. 11:27because that's passive income, which is
337. 11:28not subject to social security and
338. 11:30Medicare tax. Here at Tax Alchemy, we
339. 11:32run that calculation all the time, even
340. 11:34though typically it's right around
341. 11:3550,000 in net profit is when someone
342. 11:37will switch to an S corporation. We know
343. 11:39that it's very important to ask the
344. 11:40right questions before doing so. That's
345. 11:42all I got for today's video. As always,
346. 11:44don't forget to like, comment, and
347. 11:45subscribe to the channel. Also, if
348. 11:46you're high income earner and you want
349. 11:48help cutting your tax bill by 50, even
350. 11:49100% with advanced tax strategy and
351. 11:52you're making over half a million
352. 11:53dollars a year, half a million dollars a
353. 11:54year, you can book a call with our team
354. 11:56by visiting the link in the description
355. 11:58below. And if you want to learn all
356. 12:00things you should do in regards to
357. 12:02setting up your S corporation, then
358. 12:03check out this video right here. This
359. 12:05will give you feedback in regards to
360. 12:06structuring your S corp. Thank you so
361. 12:08much for watching this video and I'll
362. 12:09see you on the next one. Cheers.