Ask a CPA

A partnership that pays premiums for health insurance for its partners has a choice. It may treat the premium as a reduction in distributions to its partners or deduct the premium as an expense and charge each partner's share as a guaranteed salary payment taxable to the partner. The partner reports the guaranteed payment as non-passive income on Schedule E and 100% of the premium as an adjustment on Form 1040 line 29.

Simply stated, an S Corporation is taxed in the same manner as a partnership and is not taxed at the federal level. The income or losses and expenses flow through to the shareholders. A "C" Corporation pays tax on its profits and when the owner shareholders take profits from the corporation, the distributions take the form of taxable dividends. In effect, this is a double taxation of profits. There are advantages and disadvantages to both S Corporations and Regular C Corporations. Speak to your local CPA about the tax strategies of selecting the type of entity for your business.

A limited liability corporation offers limited liability to its owners, but may elect to be taxed as a partnership which passes all the income and losses through to its owners. A C corporation is taxed at the federal level and profits are either retained by the corporation or distributed to the shareholders. A profit distribution is called issuing a dividend. These profits are then taxed as income in the shareholders personal taxes. With a LLC, the owner has options of how to be taxed. The IRS allows 3 choices. A Corporation tax like a general C corporation, Partnership taxation like a S corporation or as a Sole Proprietorship.

DBA is an acronym for "Doing Business As". It is also known as a Fictitious Name. Most states require that sole proprietorships and partnerships that are conducting business under a name other than the owner(s) must file for a DBA certificate in the county where business is conducted. The DBA certificate is generally obtained at the Clerk of Court of the county in which business will be conducted. Fees are typically between $100 and $225 and most courthouses have records that may be searched to determine if your suggested name will be unique.

If you have a business that generates a big profit over and above what you would consider reasonable compensation for the services that the owners provide, you may be unnecessarily subjecting the profits to self-employment taxes if you are operating as an LLC taxed as a partnership.
If you think your business may fit this description, your LLC may benefit from choosing to be treated as an S corporation under the tax laws.
To have your LLC receive the tax treatment of an S Corp, you must file an election with the IRS using Form 2553. You must file Form 2553 within the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.
There are drawbacks, however, so no decision should be made without discussing your own situation with a qualified professional.

In an S corporation, only the salary paid to the employee-owner is subject to employment tax.
The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings.
A major factor that differentiates an S corporation from an LLC is the employment tax that is paid on earnings.
The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 12.3% which goes toward social security and Medicare. The entire net income of the business is also subject to self-employment tax.

A S corporation has no flexibility in how profits are split up amongst its owners.
The profits must be distributed according to the ratio of stock ownership, even if the owners may otherwise feel it is more equitable to distribute the profits differently.

An S corporation can have no more than 75 shareholders. None of the shareholders can be nonresident aliens.

None of the shareholders can be nonresident aliens.

A LLC similar to S Corporations, Limited partnerships and Sole Proprietorships report theor profit or losses on there personal tax returns.