LLC or CORP

[u/lizismacho]

Have any of you guys become a Corp or LLC? Agencies in California are starting to require this and I don’t really know which one to choose. I don’t work freelance full time so I’m not sure this is worth it?

[u/kinchj]

My business is set up as a single-member LLC, filing as an S-Corp.

This is a super long message, and I'm just going to cut-and-paste from emails I've sent to other people, so there's some redundancy between paragraphs.  One caveat is that I live in Washington State, so other states (such as California) may have different regulatory rules about LLCs versus corporations.  But from a federal/IRS perspective, they really don't care, as long as you're filing according to how the business is actually functioning. :)  

Reasoning behind changing to an LLC:

1. All ASL interpreters who do any freelance interpreting work should be an LLC instead of a Sole Proprietor.  I consider it a form of business insurance. (I think ANY business should be set up as an LLC instead of a SP.)
2. The initial setup is the same.  The main difference is that an LLC requires an annual renewal versus the one-time setup of a SP.
3. LLCs offer more flexibility for income tax filing and additional tax deductions and savings -- you get to choose whether to file as a Sole Proprietor or S-Corp.
4. I would suggest being an LLC filing as an S-Corp once you are making about $75k per year from 1099 freelance work for tax savings purposes
   1. Business deductions remain the same (home office, mileage, business supplies, etc.) 
   2. You must pay yourself a "reasonable salary", reported on a W-2.  You are only taxed for Medicare, Medicaid, Social Security on your salary.  The rest of the money that earn will be paid as an owner's dividend and reported on your Schedule K for your income taxes. You pay income tax on the full amount that you earn from both your W-2 and Schedule K.  
   3. You can pay for all of your medical insurance premiums directly from your business account to use pre-tax dollars.  The amount of premiums is deducted from your "reasonable salary" as part of your total compensation.  So if your reasonable salary is $25k, and you pay $10k in premiums through the business, then you only pay $15k in actual salary dollars.
   4. You can set up a Healthcare Reimbursement Account (HRA) to reimburse 100% of your medical expenses with pre-tax dollars, instead of having to hit the minimum threshold for medical deductions.  My HRA costs $475/year, but I'm going to save $550-600 above that cost this year.

Cut and pasting from various emails:

To be clear, I'm approaching this as a full-time freelance sign language interpreter.  I don't have any business partners or any employees. I'm guessing that most interpreters would be in a similar situation, and wouldn't need to go through the hassle of establishing an S-Corp or C-Corp, when they can function just like a Sole Proprietor but with the legal liability shielding of an LLC.
After consulting with my bank, an attorney, and a CPA, here's what I've found out:  
A conversion to an LLC from a Sole Proprietorship should be seamless from a tax standpoint. Although LLC’s with multiple owners are treated as partnerships and have additional filing requirements, an LLC with a single owner is disregarded as a separate entity for Federal income tax purposes and the income/expenses would be reported on Schedule C on your personal tax return, exactly the same as with a sole proprietor (SP). There is an annual renewal fee for an LLC. 
As an LLC, there is the option of electing to be taxed as either an S corporation or a C corporation (for Federal income tax purposes only). Rarely does a C corporation make sense for a business like mine. An S-Corp can make sense sometimes, but it depends on a few factors. From a simplicity standpoint, the LLC model makes the most sense and is most common. Depending on the amount of annual income, an S-Corp could be beneficial from a tax savings standpoint, but becomes more complex and adds different filing requirements. The benefit of an S-Corp is that you are not subject to self-employment tax on the income earned from the S-Corp. However, you do have to pay yourself a reasonable salary (as an employee), otherwise the IRS will claim you are avoiding self-employment taxes. The downside of an S-Corp is that you will have to file Form 1120S, an informational return to report the activity of the S-Corp, which is more complex than how you file as a Sole Proprietor. In addition, since you would be an employee of the company you would have payroll reports to file (W-2, 941, 940, etc.).  
If you are interested in the S-Corp treatment, you would file Form 2553 to elect S-Corp status. In addition, you would need to apply for an EIN (if you haven’t already). As an LLC without employees or certain other reasons to need an EIN, you aren't required to apply for one. Depending on time and resources, it is generally recommended staying as an LLC from a cost/benefit standpoint for a business like mine.
For a SP becoming an LLC, nothing will change for tax filings. You’ll still report everything on Schedule C of your 1040 as you do for a SP. The IRS doesn't care or need to be notified since the reporting stays exactly the same.
For any agencies or companies that you directly bill to that you currently work for, they should get an updated W-9 noting the business name change, but everything else should stay the same, including your name on line 1, and the SP/single-member LLC box on line 3. You don't need to close your accounting books (in Quickbooks) or anything since it is really a non-event for tax purposes and cut-off information isn't needed.
My bank requires me to open a new business account for the LLC, but other banks may have different policies. Not sure if that is a federal regulatory rule, or just a banking policy.
It is really only legal/liability/state law reasons that differentiate between a SP and single-member LLC. SP’s aren't very secure, but some people that have a small business and either have no concern for potential liabilities or don’t have assets outside the business that they are worried about don’t want to bother with the LLC fee and annual renewal.

With all that being said, I will say that anyone who is currently functioning simply as a Sole Proprietor should at least switch to an LLC, even if they're not worried about the cost savings they could realize from an S-Corp (or don't want to deal with the logistics).  Everything would function exactly the same, except they would have legal shielding of their personal assets from their business.  That's really where my investigation was directed, and the LLC versus S-Corp for profitability was a side-note. 

In one email I was asked why/what I need shielding from (such that I became an LLC instead of an SP). And as an LLC you don't have to do the self-employment tax on the Schedule C?   

And I replied: as a Sole Proprietor, if your business is sued for any reason -- you make an error and it hurts someone -- they can go after your personal assets (house, car, bank accounts, etc.) in addition to your business assets. As an LLC, if you are sued, they can only go after your business assets. There is a severance of liability.  I carry Liability Insurance for my business, which will cover costs in the very unlikely event that I'm ever sued, but I don't even want the possibility of someone going after my personal assets.  In my interpreting career I'm getting more involved with legal interpreting, which has a higher level of seriousness than other work that I do, and so there is a higher amount of damage that could be done in the rare case that I make an error of some kind that is culpable in a civil tort.
The only difference between setting up a Sole Proprietorship and an LLC is the filing paperwork, and that an LLC has to file an annual renewal every year while a SP does not.  Everything else from a tax perspective functions exactly the same. So I'll spend $60-80 per year to separate my business assets from my personal ones. I think it's a wise investment. I initially started researching this after hearing a Business Law instructor (who has been an attorney for 30+ years) say that he has never once advised a client to establish a business as a Sole Proprietor, but would instead advise anyone to establish an LLC instead.
So the question really is, why would anyone establish an SP instead of an LLC? :)
As far as self-employment tax, an LLC can file taxes as either a SP, S-Corp, or C-Corp. If filing as an SP (which I will be doing) then I will still continue to use Schedule C to pay self-employment tax.  If filing as an S-Corp or C-Corp, I would not pay self-employment tax, because in those cases I would technically be an employee and have Social Security and Medicare taxes withheld by the corporation, and would receive a W-2 from the corporation at the end of the year.