After the AB5 law was introduced in California at the end of 2019, the law which affects carriers in labor and tax law, truckers received a quantity of information that increased their doubts and confusion.
Transportation companies began to threaten, pressure and even force owner-operators to convert their business into a Limited Liability Company or LLC. Very few truckers know what an LLC really is and the benefits it could bring them. If we do not clearly understand the pros and cons of this option, we will have negative results.
What is an LLC and an "S" corporation?
An LLC is a legal business structure, while an "S" corporation is a tax classification. That is, you can choose to structure your LLC and ask the Internal Revenue Department (IRS) for your election for tax purposes. Many companies choose these tax advantages, but it is very important to know how and when they are applied. Business entities and tax structures can be difficult to understand. Understanding them can save you time and money when applying those benefits.
What is an LLC?
The LLC is the newest form of entity that has become available and began to become much more popular in the mid to late 1990s. An LLC, or limited liability company, is a legal business structure that protects the personal assets of the individual.
An LLC is considered a distinct entity, which means that there is a financial barrier between the business and the owner. The owners of an LLC are called members, and LLCs can be owned by a single member or by multiple members. You can choose LLC members or a manager to run the business.
LLCs are transfer entities, which means that the business structure does not pay its own taxes. Instead, the business owner claims the profits on his personal tax return.
What is an “S” Corporation?
An “S” corporation is not a business entity, but a tax classification. Both LLCs and corporations can be structured to be taxed as an “S” Corp. It is also a transfer entity in which profits are transferred to the owner`s personal tax return. However, unlike an LLC, the income that flows through an “S” Corp. is not subject to self-employment tax.
Both an LLC and an “S” corp. provide limited liability. There are more restrictions for creating an “S” Corp. than for an LLC. To form an “S” Corp. it must be a US company and cannot have more than 100 owners. The owners of an “S” Corp. are considered employees and must be paid a reasonable salary.
For more information about this or any other tax topic, you can contact the Jagg Tax Solution, Inc. office at 909-590-9307 and we will be happy to answer your questions.