For the income pass-through reasons, you're right that a S-corp or LLP is the way to go. If I recall correctly, the tax difference between the 2 boils down to how much you're going to make - that is if you make over $X per year you want one solution and if you make under $X you want the other. I was in a similar situation, crunched the numbers, and determined that an S-corp was the correct solution for me, but your situation could well be different. I believe an LLC/LLP also dodges the $800 / yr that CA demands of a corp for the privilege of doing business in its state, so that might also factor into your consideration (not so sure about that one though, my LLP isn't in CA).
You can always convert to a C-corp later, but it doesn't seem like it makes much sense for you now.
> the tax difference between the 2 boils down to how much you're going to make - that is if you make over $X per year you want one solution and if you make under $X you want the other.
I have an LLC, and some time ago I discussed about converting it to S-Corp with my accountant. I forgot the details but the logic was like this:
In LLC, you pay 2.9% of your net income (wage + dividend) for SE Medicare tax, no matter how much you make. In S-Corp, FICA tax, in which 2.9% Medicare is included, is only taxed on the wage portion. Thus if your company makes a lot more than the standard wage, S-Corp saves the 2.9% on the dividend part of your income (Wikipedia has example calculation: http://en.wikipedia.org/wiki/S_corporation ). If your company just makes around or below the standard salary, you don't have this advantage of S-Corp, and it is a matter which one needs more paperwork and accountant fees; for one-man small LLC like mine, these overhead cost is smaller than S-Corp.
(Note: Social Security Tax has a cap, so it doesn't make difference if you set your wage above the cap. You cannot set your wage too low in order to save FICA tax; it must be "reasonable").
Converting LLC to C/S-Corp looked a lot more work than converting S-Corp to C-Corp. My accountant suggested me that the easiest way was to dissolve my LLC first then establish a new S-Corp. Since my LLC was for small business and I didn't have any prospect of external funding, I decided to keep LLC.
If you register as an S-Corp in California, your company will be able to get group health insurance regardless of your personal health situation. It's required by California law. You won't be able to if it's an LLC. This may not be a big deal for you, but it was for me since I wouldn't have been able to do my startup if I couldn't get health insurance through the company.
"Every limited liability company which is doing business in California or has filed Articles of Organization or an Application for Registration with the Secretary of State's Office is subject to the annual limited liability tax of $800."
If you're going to have a "lifestyle business" and you will be living in California you may as well just register the company in California. All Delaware gets you is more paperwork, i.e. the requirement to file in Delaware AND California.
Comments
I've got both an LLP and an S-corp.
For the income pass-through reasons, you're right that a S-corp or LLP is the way to go. If I recall correctly, the tax difference between the 2 boils down to how much you're going to make - that is if you make over $X per year you want one solution and if you make under $X you want the other. I was in a similar situation, crunched the numbers, and determined that an S-corp was the correct solution for me, but your situation could well be different. I believe an LLC/LLP also dodges the $800 / yr that CA demands of a corp for the privilege of doing business in its state, so that might also factor into your consideration (not so sure about that one though, my LLP isn't in CA).
You can always convert to a C-corp later, but it doesn't seem like it makes much sense for you now.
> the tax difference between the 2 boils down to how much you're going to make - that is if you make over $X per year you want one solution and if you make under $X you want the other.
I have an LLC, and some time ago I discussed about converting it to S-Corp with my accountant. I forgot the details but the logic was like this:
In LLC, you pay 2.9% of your net income (wage + dividend) for SE Medicare tax, no matter how much you make. In S-Corp, FICA tax, in which 2.9% Medicare is included, is only taxed on the wage portion. Thus if your company makes a lot more than the standard wage, S-Corp saves the 2.9% on the dividend part of your income (Wikipedia has example calculation: http://en.wikipedia.org/wiki/S_corporation ). If your company just makes around or below the standard salary, you don't have this advantage of S-Corp, and it is a matter which one needs more paperwork and accountant fees; for one-man small LLC like mine, these overhead cost is smaller than S-Corp.
(Note: Social Security Tax has a cap, so it doesn't make difference if you set your wage above the cap. You cannot set your wage too low in order to save FICA tax; it must be "reasonable").
Converting LLC to C/S-Corp looked a lot more work than converting S-Corp to C-Corp. My accountant suggested me that the easiest way was to dissolve my LLC first then establish a new S-Corp. Since my LLC was for small business and I didn't have any prospect of external funding, I decided to keep LLC.
If you register as an S-Corp in California, your company will be able to get group health insurance regardless of your personal health situation. It's required by California law. You won't be able to if it's an LLC. This may not be a big deal for you, but it was for me since I wouldn't have been able to do my startup if I couldn't get health insurance through the company.
Well, I plan on incorporating in Delaware if that's what's agreed upon, which, I believe, has a much much lower annual fee. Thanks for the advice.
If you're doing business in CA you'll still need to register as a foreign corporation, so the Delaware registration gets you very little.
http://www.sos.ca.gov/business/corp/corp_faq.htm
"Do I have to register (qualify) my out of state (or country) corporation in California?"
And it looks like the LLC doesn't avoid the fee:
http://www.sos.ca.gov/business/llc/llc_faq.htm
"Every limited liability company which is doing business in California or has filed Articles of Organization or an Application for Registration with the Secretary of State's Office is subject to the annual limited liability tax of $800."
If you're going to have a "lifestyle business" and you will be living in California you may as well just register the company in California. All Delaware gets you is more paperwork, i.e. the requirement to file in Delaware AND California.