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Default partnership vs Scorp for LLC.

Asked by Amanda Rodriguez-Medina

Hello, Is it true that an S Corp classification for a multimember LLC is better or more beneficial for tax purposes? I currently make dog bow ties and accessories and want to start selling them but I need a tax Id and I’m not sure which should I pick. Thank you!

2 Answers

Sorry, forgot to address the tax ID Number. The answer again is....it depends. Both questions need to be part of the discussion with your tax advisor.

Hi Amanda,
Your question does not have a simple straightforward answer because there are several things that should be considered but may be beyond the scope of your question. I will take a shot at a short answer. Multi-member organizations can elect for tax purposes to be taxed as a partnership or an S-Corp. If a partnership, a partner does not get a payroll check because partners are not treated as an employee, partners receive guaranteed payments for services and/or partner distributions of partnership net income. In an S-Corp, a shareholder employee gets paid a salary/wage as an employee compensation for services and may receive S-Distributions of net income as a shareholder. Which is better, it depends on those other items I alluded to like reasonable compensation issues, net income, tax basis and other items. I believe your question is best answered by sitting down with a tax professional and having an in-depth discussion about entity selection for both state law purposes and income tax purposes.

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