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Is it better to have a C-Corp or LLC for your consulting company?

I am self employed and I want to setup a company where I can pay myself a salary so all of my income is not subject to the 15.5% self employment tax. What is the best structure for this? Can it be a holding company so there are other companies in the structure that also have income?

Jan 24, 2012 by W from La Jolla, CA in  |  Flag
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When you set up as a C Corp, are a sole owner and pay yourself a salary, you eventually wind up paying both the employer and employee side of the payroll tax in addition to both State and Federal Unemployment tax. You might want to consider setting up as a single user LLC in order to file schedule "C" on your 1040. You would not pay unemployment tax if you draw down as a consultant. As mentioned above, it would help to get advice from either an Enrolled Agent, CPA or Tax Attorney.

Comment   |  Flag   |  Mar 08, 2013 from Newport Beach, CA

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This is general advice, but based on the information you've provided, you should discuss setting up an S-Corporation with your CPA or attorney. Your salary is always subject to the Payroll tax: the company pays half, and you pay half. An S-Corp allows you to pay your self a reasonable salary for your industry, then possibly receive additional distributions. There is a move afoot to force these distributions to be subject to the payroll tax as well, but for now this is not the case. Stay tuned...

Comment   |  Flag   |  Jan 25, 2012 from Arvada, CO

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I've had both and I must say that this isn't a simple question or easy answer. I recommend that you consult with a qualified, experienced business attorney on this one. The cost in the short run can save you a lot of money and headaches if you make the wrong choice in the long run. Also, California treats LLCs differently than a lot of other states - so make sure you're getting advice from someone who knows the differences.

Comment   |  Flag   |  Feb 08, 2012 from San Diego, CA

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Jason Hull Level 20

When I had a software development company, we chose LLC with partnership tax status. It was great when we were in startup mode and had a taxable loss each year. However, once we got to the point where we were rather profitable and paying the partners salaries (in that case, guaranteed payments), I think we should have changed to a S-corp filing status so we could take advantage of the dividends vs. salary distribution. We got killed with self-employment tax and probably paid 50% more SE tax than we should have. The advantage of an LLC is that, if you chose to have different share classes, it's easy to do so and they're quite flexible.

If you choose to go the S-corp filing route, you'll need to file IRS form 2553.

Comment   |  Flag   |  Mar 06, 2013 from Fort Worth, TX

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Barry Rabinowitz Level 19

I would suggest an LLC. This is alot simpler and less reporting . For taxes you can elect to be taxed as a partnership: take all income and expenses on schedule C. No corp taxes to pay. No corp tax return to file.

Comment   |  Flag   |  Jan 25, 2012 from Fort Lauderdale, FL

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