How do I choose between a PLLC and S corporation for my architect business in California?
While we cannot give you specific advice for your situation, we can offer you some general information about these two types of business entities.
You have already read about them and have seen that both provide protection from lawsuits for the owners. A s corporation is simply a designation given by the IRS to determine how the company will be taxed. Both LLCs and s corporations have their revenue passed from the company to the owners (members or shareholders) to be claimed as income on the individual's tax return. But that is just the way the IRS handles them.
First thing to remember is that the state of California does not permit limited liability companies to be formed to provide professional services. California does, however, allow the formation of professional corporations. A domestic or foreign LLC may not render professional services. (Corp. Code § 17375.) “Professional services” are defined in California Corporations Code sections 13401(a) and 13401.3 as:
Any type of professional services that may be lawfully rendered only pursuant to a license,
certification, or registration authorized by the Business and Professions Code, the
Chiropractic Act, the Osteopathic Act or the Yacht and Ship Brokers Act.
California handles these 2 entities differently on the state level. S corporations that are doing business in California must pay a 1.5% net income tax. LLCs are not subject to this tax, but must pay an entity-level fee based on gross receipts. If the business operates at a loss, the corporation form is generally preferable. If the entity operates at a profit, then the LLC will generally result in the lesser tax liability.
LLCs in California taxed as partnerships must pay an entity level tax based on the "total income" reportable to California for the tax year. "Total income" means worldwide gross income, plus the cost of goods sold, paid or incurred in connection with the LLC's business.
Here is a sample comparison for the S corporation and the LLC:
If you are in a business that has about $500,000 in gross sales and has about a 15% net profit margin (very good) that will equal $75,000 in net income.
If your business was an S corporation, the S corporation would pay a tax of $1,125. If it was an LLC it would pay a tax of $900 plus $800 in franchise tax. In this example, the LLC would pay a higher over all fee.
With a LLC, record keeping is less formal. You need to comply with only a nominal amount of corporate formalities. Furthermore, you don’t have to have payroll. This allows you to take draws when needed, which can help when it comes to cash flow situations. None of this is true for the S corporation. If your revenues are solid, it doesn’t really matter. If they are not, it can make a big difference.
It may be best to consult with a local tax professional for specific advice.