Write-offs for LLCs vs. C-Corps
Jeff
3 Comments
April writes:
We have been operating out of an LLC for 3 years now and each year we have made a profit. After speaking with other business owners that have companies relative in size (3-5 employees, Texas, $500k gross) we have come to realize that because we are an LLC we are not getting many of the tax write offs that they receive b/c we are not incorporated. Is this a smart financial decision? Are there truly more ways to write off expenses?
What you need to do is find an accountant with knowledge in dealing with both LLCs and traditional corporations, because the answer to your question is a big fat "it depends". Without knowing the details of your particular situation though, I would guess that you are better off as an LLC (as you are now) than as a C-Corp. The reason is that you stated you are profitable, and I presume that the way you are paying yourself is through those profits.
If you wanted to switch to a c-corp, then there is no longer a pass-through of profits to the owners as there is in an LLC. That means if you make $100,000 a year via the profit pass-through now, you're going to have to pay yourself a salary of $100k instead, and you'll owe taxes on that salary just the same.
The possible benefit is that the C-corp gets to count your salary as an expense, and there are, perhaps, other things which can be expensed in a c-corp which you don't get right now (research and development tax credits is one such thing that comes to mind).
If the result of these expenses and deductions is that the c-corp operates the year in the red, then the c-corp has the benefit of accumulating losses as an offset to future earnings. If you take a look at the public filing of most relatively recent technology companies, you'll often see a giant loss on the balance sheet under "retained earnings" (or something similarly named). That's what this number is -- accumulated losses from the over the years).
So, *if* the c-corp can still pay you what you are making now, and *if* the sum total of the expenses results in the c-corp working in the red, then perhaps you have something.
Then again, even if you do have something, you have to judge whether or not it's even worth messing around with. Again, a good CPA should be asking questions about your current short term situation, and your long term plans. If this is a company you plan to operate yourself for years and years to come, that might have a different structural plan than a company you plan to either sell later, or perhaps step down from the day-to-day operations.
And, keep in mind that operating a c-corp, from a legal, accounting, tax and paperwork standpoint is substantially more complex than operating an LLC. You will want to weigh that complication vs. any expected cost savings. It might be cheaper, but it might also be a huge pain in your behind and an administrative burden you just don't have time for.
Hope that helps - good luck!
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