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LLC and S Corp Frequently Asked Questions

Contents

Most of the guidance below applies to S Corp tier members, since it covers payroll, shareholder distributions, and the Business Tax Return. Sections that apply to both tiers are noted where they appear. If you're on the LLC tier, see the LLC Membership Tier Overview & FAQ for guidance written for your setup.

General Questions

What is a Business Checking Account?

  • It's opened with the EIN of the LLC we are helping you with.
  • Client and customer income gets deposited here first.

NOTE: Do not use your business checking account for personal transactions other than transferring money to your personal checking account. Stop using personal checking accounts for business transactions ASAP.

Click here to learn more about business checking accounts.

Am I an S Corp or an LLC?

Both, in a sense, which is what makes the question confusing.

An LLC is a legal entity you form with your state. An S Corp is a tax classification you elect with the IRS, and it layers on top of an LLC that already exists. The two aren't alternatives to each other. One is your legal structure, the other is how the IRS taxes it.

Which term describes you comes down to whether you've made that election:

  • LLC tier. You have a single-member LLC (SMLLC) and have not elected S Corp tax classification. Your business income is reported on Schedule C as part of your Individual Tax Return (ITR), and you don't run payroll for yourself.
  • S Corp tier. You have an LLC that has elected S Corp tax classification. You pay yourself a reasonable salary through payroll as an owner-employee, and your business files its own Business Tax Return (BTR) each year. That's a mouthful, so people often say "I'm an LLC based S Corp."

If you aren't sure which applies to you, check your membership details in your Collective dashboard or ask your Collective team.

What is my S Corp election date?

  • The S Corp tax election date is the effective date listed on IRS Form 2553 Box E. Collective will work on your books from the first of the month of your Form 2553 Box E date.
  • From this date forward, the IRS will regard your business entity as a pass-through entity for tax purposes, and require you to report the S Corp business activity on its own Business Tax Return called the 1120s.
  • Any business activity before this date will be reported on the Schedule C of your Individual Tax Return called the 1040.

What are shareholder contributions?

Personal deposits of funds from the accounts of the shareholder (you!) to the business. These contributions will increase the Shareholder's Basis in the company. This will be reflected on the Balance Sheet and will not be shown as income on the Profit & Loss Statement.

How do I Get Paid as an S Corp Shareholder?

Payroll

The reasonable compensation or amount of money you would expect in exchange for the work you perform if you were doing it for another business of similar size. Beginning in the first calendar year, the reasonable compensation must be paid by the company to anyone working for the company (paid as paycheck) which will be reported on Form W2.

  1. This amount varies based on geographic location, industry, experience, hours worked, and attribution of revenue to employees or contractors.
  2. Collective will review the reasonable comp on a quarterly basis
  3. To run first payroll, it should be funded via income and not personal funds (i.e. Shareholder Contributions). Therefore, the first payroll can be delayed if you're still getting your business started, but reasonable compensation should still be paid during the first year.
  4. Your Onboarding Accountant will help you run your first payroll via Gusto

Accountable Plan for Mixed-Use Purchases

There are mixed purchases that can be considered both personal and business (i.e. your home's internet, utilities, rent/mortgage).

  1. All of these expenses will be paid from your personal account
  2. On a monthly or quarterly basis you'll fill out the accountable plan, and the Total Employee Reimbursement Expense will be the amount you transfer from your business checking to personal checking
  3. Don't forget to upload the spreadsheet to your Member Dashboard, so we can categorize it as an expense rather than a Shareholder Distribution!
  4. During your Training Call, your Onboarding Accountant will go over this article and the Reimbursements tab located in your Member Dashboard.

Shareholder Distributions

The disbursement of funds from the business account to the shareholders' account (i.e. your personal checking account or your personal credit card payment)

  1. Shareholder Distributions are not taxed. You pay tax on the business profits whether they are distributed or not. Distributions do, however, impact your shareholder basis. A negative shareholder basis can be subject to capital gains tax. For more information on shareholder basis, click here.
  2. For more information on shareholder distributions, and how shareholder distributions are different than wages, click here.

Taxes

Why do I have monthly payroll taxes and also quarterly estimated tax payments?

  • It is a common misconception that taxes are paid annually by some and monthly or quarterly by others. All taxes are due throughout the year.
  • As an employee, your income taxes are withheld and remitted to the IRS by the payroll provider (i.e. Gusto). As the owner of the company, you receive additional income in the form of business profit. These funds don't automatically have taxes withheld and remitted, so you must pay in the form of Estimated Tax Payments "quarterly".
  • The deadlines are April 15th, June 15th, September 15th, and January 15th, or the following business day. State deadlines usually mirror these, though California does not have a Q3 payment.
  • For how your estimate is calculated, and how to review or change it, see Understanding Your Quarterly Tax Estimates (QTE).

How much should I set aside each month to have enough for the quarterly estimated payments?

What tax return(s) will Collective file for me?

  • Collective will file your 1120-S and, if you've opted-in, your 1040.
    • A form 1120-S is the tax return form for businesses that are taxed as s-corps.
    • A form 1040 is the tax return for an individual (or married couple).

Business Expenses

Monthly Health Insurance Premiums

If you pay a monthly premium for medical, dental, or vision (and it's under your name), it's considered a business expense! There are a few exceptions like COBRA. You may be asking, "what if it's under my name but I have my partner and/or dependents under the plan?" You can still include it as a business expense!

Prescriptions, copayments, OTC medications, etc. are not considered as a business expense.

For more information, see here. Your Onboarding Accountant can help you set this up in Gusto to reflect this as a benefit that your S Corp offers.

Meals & Entertainment

This Meals & Entertainment article will go into more detail, but most business meals with clients or prospects allow a 50% deduction on your tax return - that means you can write off half the cost of those business meals.

However, entertainment expenses are nondeductible, even if they’re to build relationships with clients or prospects. What's considered entertainment? This includes sporting events you go to with customers, golf memberships you pay to go golfing with customers, etc.

Car Expenses

If your car is purchased in your business name AND it's 100% for business use, your car may qualify as a business vehicle. If it doesn't meet this criteria, it would be considered a personal vehicle. Even if your vehicle is classified as a personal vehicle, there are still deductions that you can write off - like parking, tolls, and mileage. This article will go into more detail with the criteria & applicable deductions.

Home Office Expenses

These types of expenses will be paid via your personal account, but you may be able to reimburse yourself for the business portion. As discussed above, this will be included in your Accountable Plan for Mixed Use Purchases.

Chart of Accounts

We've created this Chart of Accounts article to go over the different accounts (or categories) Collective will use for your financial books as well as examples for each account.

What to Expect Going Forward?

Once you're set up, your membership settles into a regular rhythm:

  • Ongoing bookkeeping
  • Financial statements and reports
  • Quarterly tax estimates

Your financial statements and reports

Profit & Loss Statement. Your company's revenues and expenses during a particular period, such as the month of March or the full year.

Balance Sheet. Your company's assets, liabilities, and shareholder equity. Unlike the P&L, the balance sheet represents a point in time, such as your business checking account balance as of June 30. It also shows money moving between accounts. If you take a shareholder distribution, your business checking account goes down by that amount and shareholder distributions go up.

A few common examples of each type:

  • Assets: checking and savings accounts, equipment, furniture
  • Liabilities: loans and credit cards
  • Equity: shareholder distributions, contributions, and capital stock, meaning your initial contribution amount

Transactions. The full record of every transaction behind the statements above.

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

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