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Member of Russell Bedford International, a global network of independent professional service firms.
Choosing the right business structure can make or break your bottom line as an entrepreneur. The decision to become an LLC or an S corporation can be confusing. In this episode of CK Small Business Focus, CK Tax Manager Eric Challenger breaks down how these two popular structures differ when it comes to taxes, liability protection and administrative complexity. Whether you’re just starting out or your business has grown past the point where self-employment taxes are eating into your profits, this episode will help you understand the pros, cons and key considerations of each option. Then you can decide which structure fits your business today and when it might be time to make a change.
Transcript:
Welcome everyone to another edition of the CK Small Business Focus. My name is Eric Challenger and I’m a Tax Manager at Cray Kaiser. Today we are going to be analyzing which structure, LLC or S corp, is best suited for your business.
Starting a new business comes with a long list of important decisions and one of the most crucial is selecting the right entity type. The two most common structures for small businesses are the limited liability company and the S corporation. Each offering unique benefits and drawbacks, understanding how these entities differ in terms of taxes, legal treatment, and administrative complexity can help you make the right decision as your business grows.
Let’s start with the LLC, the flexible starting point. An LLC is often the go-to legal structure for new entrepreneurs. It offers limited liability protection, meaning your personal assets are typically shielded from business debts and lawsuits. and allows for flexibility in ownership and income allocation. For tax purposes, the IRS doesn’t recognize an LLC as a distinct tax entity. Instead, a single-member LLC is treated as a disregarded entity with all activity reported on the owner’s individual tax return on Form Schedule C. A multi-member LLC is taxed as a partnership unless it elects to be treated as a corporation.
Simple tax filings for SM LLCs. Just report on your individual return. Flexible ownership and income allocations make it easy for you to allocate income to specific members.
Low administrative burden. Ideal for startups and low-profit operations. However, active owners of an LLC must pay self-employment taxes on the entire net income, which can be costly as the business grows.
Now let’s talk about S corporations. An S corporation isn’t a legal entity. It’s a tax election that an LLC or a C corporation can make with the IRS. Once elected, it changes how the business is taxed and allows owners to reduce their SE tax burden by splitting income into salary and distributions.
Payroll tax savings. Unlike the LLC, S corp owners can pay themselves a quote-unquote reasonable salary and take the rest of their income as distributions exempt from SE tax. Maximize qualified business income deduction. If structured correctly, you can take full advantage of the 20% QBI deduction introduced by the Tax Cuts and Jobs Act.
Lower audit risk. S-corporations file separate business tax returns reducing audit visibility compared to Schedule C filers.
Increased compliance. You’ll need to file payroll, issue W-2s, and submit a separate business return.
Reasonable compensation. Reasonable compensation is required, and the IRS scrutinizes this closely. State recognition varies. Some states may not recognize S corporation election and may impose additional tax filings, or you may have to file as a C corporation.
Electing S corp status makes the most sense when your business is generating net income significantly above your reasonable salary. While “reasonable” is subjective, many practitioners suggest considering an S corporation once your annual income exceeds $150,000. The tax savings from reduced SE taxes can often outweigh the added compliance costs from becoming an S corporation. But not every business is ready for that transition. If your income is modest or irregular, or if you value operational flexibility and minimal paperwork, the LLC structure may still be a better fit.
So the bottom line, your choice of business entity will shape your tax obligations, personal liability, even your ability to raise funds. While most businesses start as LLCs for simplicity, making the S corporation election can be a smart strategic move once you’re generating higher profits. Still unsure which path is right for you? The entity that suits your business today may not be the best option tomorrow. If you’re a single member LLC or a partnership looking to explore the tax benefits of electing S corporation status, reach out to the tax experts at CK for tailored advice at www.craykaiser.com or call us at 630-953-4900.
For more information, download our white paper.
Managing your finances effectively begins with the right partnerships and processes. In this audio blog, Karen Hoban, a Senior in CK’s CAAS department, share practical tips to help clients get the most out of their relationship with a CAAS team. From organizing financial records to streamlining communication, Karen offers strategies designed to save you time, reduce friction and help your CAAS team deliver the service you deserve.
Transcript:
My name is Karen Hoban. I’m a senior in Cray Kaiser’s CAAS department. I’ve been with Cray Kaiser about five and a half years. Our goal is to provide excellent service to all of our clients here at Cray Kaiser. And my hope for this blog is to touch on a few ideas I have that might help our current and future CAAS clients help us to help you.
In order for us to deliver to you valuable services, I have a few thoughts on some areas to consider. The first one is documents and financial records management. These would include strategies for maintaining organized financial records, including receipts, invoices, and statements that we require in order to do your accounting or prepare any kind of tax returns. One area that we recommend is to provide us view-only access to your bank and loan statements through the bank. This doesn’t allow for any transactional access, but we can access the bank in our time in order to obtain statements timely. This also frees you up from tedious tasks that you may like us to do instead.
Another thought is to consider upgrading or switching to a cloud-based software similar to QBO or Bill.com. Using a cloud-based software streamlines efforts and allows for document storage within the program. It also offers real-time sharing. We can log in at our convenience to notice any changes that have been made or make any changes to your file.
Another area to consider is to use our portal for document management. This is a secure way to send us files, retrieve files, and we can reduce emails and back and forth of document sharing. It offers access at convenient times for both of us to view what you’ve provided to us.
Another area I’d like to touch on is technology. Again, the usage of QBO, Bill.com, or any other apps for payroll or sales that can be integrated into your accounting software helps us to help you better. Use of AI-enabled software helps in your AR and AP functions, reducing, again, the need for your time for tedious tasks. These softwares also allow us to have real-time collaboration with you and your staff members and gives us extra access to data. Changes and updates can also be made remotely.
The third area that I have to talk about is communication. I find it valuable to have an upfront investment in time to discuss your business and operations. Creating checklists with staff to refer to for documents and information needed on a regular basis, whether it be monthly, quarterly, or at year end. It helps us to be on the same page in what we require and what you know you need to provide. In addition, regular check-ins, whether it be monthly, quarterly, or even at year end, help us to stay up to date with any changes or updates in personnel or management. It allows us to ask the right questions and stay informed of any new purchases or relevant changes in the business.
Lastly, ask questions. It helps us to provide better service if we’re aware of issues, problems, or any questions that you may have.
Hopefully a few of these ideas will resonate with you. A few small or big changes in the areas of document management, technology, and communication can result in a more efficient and successful relationship. Please feel free to reach out via email or phone. We’d be happy to have a conversation on how we can better serve you.
A business valuation isn’t just a number on a page, it’s an estimate built on judgement, financial data and a deep understanding of your industry. In this audio blog, Jason Hofferica, CPA and Certified Valuation Analyst at CK, breaks down how valuations work, what their purpose is, what they can and can’t tell you and what common mistakes to watch out for.
Transcript:
My name is Jason Hofferica. I’m an assurance manager here at Cray Kaiser, and I’m a certified public accountant and a certified valuation analyst. The purpose of the valuation is to provide information to either the buyer or the seller as to what, based on the facts and circumstances that we are looking at, looks like a fair value for someone to pay. So whether it’s a minority interest, as I mentioned before, there’s an adjustment for a minority interest. There’s an adjustment for that fact that this person buying it will not have control of the company. They’ll have ownership in the company, but they won’t have control of the company. Now, as far as how they use that information, they could use it in negotiating. It’s you know, it is pretty accurate based on the information that we’re provided. However fair market value is essentially what two parties, unrelated parties will pay at an arm’s length transaction. It’s ultimately up to them what they want to determine what fair value is. We just come up with this is what we see, this is what we think the fair value is, and they could use that information to make their investment decision, whether it’s buying or it’s selling.
How accurate it can be? It is an estimate. If we’re coming up with a value of a business and they agree on a price that’s $10,000 different or something, but the information was provided to say this is where it should be around. So as far as exact, exact numbers, that’s not what it’s going to provide. It will provide a valuation, but it’ll provide an estimate.
Fair market value is what two unrelated parties would expect to pay at an arm-length transaction. So determining fair value, is for a lot of the time, for the businesses that we perform valuations for. There’s, of course, the market approach. However, the problem with that is that those companies aren’t. The market is usually a stock exchange and these businesses are nowhere near that size or complexity. So while using some of these companies for some information to see if things might be reasonable, it’s usually not the true indication of what these companies are worth. Usually it depends on the type of transaction we’re talking about, if it’s an asset only sale, if it’s just revenue, the nature of the business, but there’s all different approaches including the capitalization method and the capitalization of excess earnings. All of these factor in not only the assets in the business, but also the revenue streams of these businesses to come up with a true value of these businesses.
You might also have estate tax issues that are at play, to where you might want to go ahead and plan accordingly as to what is going to happen when the inevitable does happen so that you can have you or your estate pay the least amount of tax possible. There are different thresholds with federal and state and those are some considerations. That if somebody’s holdings are valuable enough to where they’ll start gifting some of it to their heirs, so that they can, you know, either defer some of that tax or come underneath the estate tax threshold.
Sometimes in a business, let’s say they’re a manufacturing business, some of these manufacturing pieces of equipment are fairly large and they cost a lot of money. There’s some clients that we have, that their assembly line equipment is a million dollars. Now, well, it costs them a million. Now, it may be carrying a value on the balance sheet of $150,000. Now, if an equipment appraisal is done, it says, yeah, this piece of equipment could be resold for $700,000 or so. We change that value on the balance sheet because it’s not capturing the true value of not only the assets in the business that are part of the sale or the purchase or whatever, but also in considering the revenue stream. So we adjust everything to what is it that is truly involved here.
There were some valuations wanting to be performed regarding the gifting of the shares. One of the considerations in there, of course, is there’s a lot of things that can be covered under home improvement and remodeling. So you had to really look at what does this company do? What market, what region are they in? How many competitors do they have? You have to look at all of this stuff in determining a valuation and coming up with an evaluation. And like I said, the valuation reports can be sometimes a bit lengthy, but it’ll tell you why something was or was not considered.
One of the nuances for that is, and one of the challenges too, especially in the last couple of years, has been when we analyze these revenue streams or what these businesses are capable of doing. Now the problem is, last couple of years, everybody was affected in some way by COVID, some more than others. And some of that, and some did just fine based on the industry they were in. Some saw a fall off in revenue. How much of an impact does that really have on what this company is worth? Were they able to weather the storm? Did they stay fairly consistent? So these were all kind of things to consider.
Now, on this valuation too, one thing that you also have to look at is what is the purpose of the valuation? And in this case, not only was it for gifting of the shares, but you have to consider what’s going to happen based on that purpose. So in this instance, you have to go ahead and value the company. It’s still at a fair value consideration, but your approach is you’re valuing basically a minority interest in this company. So other things that are considered on there is whether or not that person will not have control, how much is this of a value on a per share basis to them because they ultimately don’t have control over how much people get paid, how much dividends are paid out they don’t they don’t have any of that. So is what do we believe that a reasonable person at an arm’s length agreement would pay for not only not having control but we also have to consider whether or not the marketability of a company. That again comes down to what industry they’re in and how many sellers and buyers we believe that there are in the market.
Common mistakes I would say is, there is a lot of the valuation that is built off of judgment and variables, and certain variables. And it’s very important to make sure that you not only are solid with your analysis, but the reasoning for your analysis. One of the mistakes that you see, that I have seen sometimes is some have a tendency to overvalue a business because they won’t use the appropriate method. And what I mean by that is someone that is leaning too heavily on using market, so using these publicly traded companies as a large basis as to you know, this is what their EBITDA is or should be, or again, you can’t use a very, very large company, which also may have a lot more resources at their disposal, and they may be involved in a lot more things as a basis as far as we believe this company is worth just as much as this company. That is one of the errors that I sometimes see is using these methods that are not comparable to who you are evaluating, who the subject is.
We review the report internally, of course, and make sure it seems like nothing was missed. But we do issue a draft to that, and they have the opportunity to review it. They’ll read through it. They’re free to ask any questions, including why this, why not that. Sometimes there are things that, you know, we were not aware of that may or may not change something. So they get the opportunity to review it and come up with those ideas and those questions because ultimately we want them to also understand the valuation as well. Once they read through it, they, you know, have no more questions or they agree with it, then we’ll actually issue it a final report. So, yeah, it’s not just a, yeah, here’s what we think and that’s it. We provide it to, you know, the buyer, the seller, or the client, whoever is requesting the valuation and they have the opportunity to review that before we make it final.
Understanding what your business is truly worth is a critical step in planning for the future. In this audio blog, Jason Hofferica, Assurance Manager at CK, breaks down the purpose of a business valuation, when you might need one and how the process works, from high-level industry insights to detailed financial analysis.
Transcript
My name is Jason Hofferica. I’m an Assurance Manager here at Cray Kaiser, and I’m a Certified Public Accountant and a Certified Valuation Analyst.
A business valuation, in short, is a process of setting the value of a business for several reasons. You can be looking to acquire a business. You could be looking to exit a business, sell a business, maybe for estate tax planning, purposes, gifting. So there’s all sorts of different reasons to want to go ahead and get a valuation for your business or for one that you’re interested in.
They could always ask to obtain their, if there has been one, they can go ahead and request one. Or if they’re more comfortable, they can hire their own personal valuation analyst to go ahead and run the numbers as well to see if the asking price is reasonable.
A business valuation is necessary because things just happen in general. You can have a disability or a shareholder death, gifting purposes. Perhaps you want to start transferring some shares to your children or to other family members. So for these considerations, a valuation sometimes is or often is necessary to come up with these values for transfer.
So a business valuation, the process typically starts from a very high level. And in order to properly value a business, you first have to understand many aspects of not only the macro environment, but the micro environment, the market, the industry. And so typically we start from a high level. We then discuss with the client, get company history. We read industry publications to come up with different things that might impact that specific industry. And from there we start honing in on these different things that might be considerations when valuing.
We then typically look at the financial statements and five years is typical. We do do analysis of financial ratios. We compare it to those in the industry. We try to get as closely to the size and complexity of the business that we’re valuing as possible. We will then go through a process of what is called normalizing the financial statements. Often when you have these closely held companies, officers are paid a certain amount. Rent sometimes is paid to a related party. Is that market value? So all of these different financial information gets adjusted to come up with a true revenue stream of expectations.
Typically the ownership is who will go ahead and get a valuation done for either estate tax purposes, gift purposes, maybe they’re looking to go ahead and sell or from buyers. Buyers will want to know if they’re interested in a business whether or not something is appropriately valued and we will be contacted from that aspect as well.
But really, anybody with these mergers, acquisitions, valuation can be used in all aspects of these. I would say to get a valuation done when there is an event or an occurrence, that would warrant a valuation to be done of your stock.
We do go ahead and we kind of give a good assessment of what the industry and all of those variables for that company to come up with an estimate as far as hours and theme. The final report is actually quite lengthy because of the amount of research and analysis that gets put into it.
Like I mentioned before we start, very high level and kind of work our way down to not only the macroeconomics, but microeconomics regional. We’d go into the industries and it even does include all the different methods that were considered as well as why they were considered or why they weren’t considered. So that the person reading the valuation report should have a clear understanding of the why and as to why a business was valued, where it was valued.
In this latest episode of Small Business Focus, Tax Manager, Eric Challenger, breaks down the fundamentals of self-employment tax, including what it is, who it applies to and how it’s calculated. Whether you’re a freelancer, sole proprietor or a new business owner, understanding self-employment tax is essential to avoiding surprises at filing time and planning effectively for your finanacial success.
Transcript
Congratulations. You finally started your own business. Years of working for somebody else are finally over. Now you set your own schedule and reap 100% of the profits from your hard work. Unfortunately, what they don’t tell you is that even though you don’t have any traditional payroll, you still have to pay payroll taxes on your self-employment income in the form of the dreaded self-employment tax. Many new business owners are unaware of this tax and feel bamboozled by their accountants when they go to file their returns for the first time and are notified of this extra tax.
Self-employment income is the earned income derived from the business operations for people who operate as independent contractors, freelancers, sole proprietors, single -member LLCs, and some other small business owners. All SE income is subject to SE taxes. Typically, this applies to all business owners who are either disregarded entities or partners in a service partnership. Disregarded entity is a business that, one, has a single owner or two, not organized as a corporation or three, not elected to be taxed as a separate business entity. Even if you have elected to be treated as a partnership, you may still be subject to SE taxes on your flow through SE income.
SE tax is essentially payroll tax, charged at the individual level on Form 1040 to disregarded entities and partners receiving flowed through SE income. SE tax is comprised of two parts, Social Security tax and Medicare tax. As an employee, you would consistently see those extra withholdings on each check in tandem with your income tax withholdings. What you didn’t see was that your former employer was paying a matching amount on those taxes to the government. What? They were paid twice? Yes. And as the owner of your business, acting as the employer and the employee, you now get to pay both sides to a whopping total of 15.3%. The Social Security tax makes up 12.4 % and the Medicare tax makes up 2.9% for the total 15.3. However, there is some relief as the Social Security tax is capped annually after achieving a certain wage base. For 2025, that limit is $176,100. But you still have to pay the 2.9 % on the amount over that, and the Medicare tax bumps up to an additional 3.8 % for people making over $200,000 if you’re single or $250,000 if you’re filing jointly.
SE tax is calculated on your net income from operations of your business. Net income includes all of your offsets and proper business deductions, including one half of the SE tax, the employer’s side. Net income for disregarded entities is calculated on your Schedule C, profit, or loss from business. For partners in a partnership, it is flowing through your K-1, line 14, and reported on Schedule E, page 2. The tax itself is calculated on Schedule SE and includes all your SE income from all sources.
Although the tax is calculated on your return, you are required to pay as you go using the estimated tax payment system. For more information on how to make estimated taxes, please check out our other newsletters and audio blogs on the subject. Hopefully you’ve stumbled on to this article while doing your homework for starting your own business. For those of you researching after you’ve already gotten your tax bill, I’m sorry. For next year, seek out the small business experts at CK to help you better understand your SE tax requirements and how to prepare for them in advance. For more information, on small business tax topics, please visit our website at www.craykaiser.com or give us a call at 630-953-4900. Thank you for listening.
In this audio blog, CK Tax Principal, Karen Snodgrass shares insights from the Russell Bedford International Tax Conference she attended in 2023. This includes:
If you have any questions pertaining to our learnings at the Russell Bedford International Tax Conference, please contact us or call our office at 630-953-4900.
In this audio blog, CK Principal Karen Snodgrass addresses some common questions surrounding the Employee Retention Credit (ERC), including:
If you have questions about the Employee Retention Credit, don’t hesitate to contact Cray Kaiser today.
If you’ve spent any time on LinkedIn lately you’ve no doubt seen multiple posts talking about company culture, all with the similar theme—culture can make or break an organization.
At Cray Kaiser we are extremely proud of the company culture we have created. Our core values of education, integrity, people, care and trust define our work and our actions.
CK is not just an accounting firm, we are a community. Our family atmosphere promotes strong relationships. We care not only about our work, but about each other on a personal level. Which leads to greater engagement and a healthy work environment.
We believe that every member of our team has something to offer, regardless of title or experience level. We all have a common goal, and everyone contributes to the success of the firm and our clients.
To learn more about our culture listen to what Aaron McWilliams, Eva Koziel, Raimonda Kesler, and Maria Gordon have to say.
As college students are heading back to campus and beginning to hunt for the perfect internship, Cray Kaiser asked interns Thomas Cirrincione and Priyangiben Patel to reflect on their time at CK. From discussing their daily roles as interns to sharing their favorite parts of the experience, listen in on how impactful a CK internship can be for you!
In his two summers interning at Cray Kaiser, Thomas Cirrincione experienced many aspects of the business, from administrative work to employee audits and working in the field. His time at CK allowed him to connect the dots between classroom curriculum and real-world situations.
Hear Thomas reflect on his time spent interning with the CK Team in the audio recording below.
Priyangiben interned with Cray Kaiser for seven months and is excited to apply the knowledge she gained at CK when she heads back to the classroom. She credits Cray Kaiser with giving her clarity on which aspect of accounting to pursue after her graduation from DePaul University.
Listen to Priyangiben’s audio blog below to hear more about her CK internship experience.
If you are interested in learning more about internship opportunities at Cray Kaiser, learn more here.
Studies show that workplace mentors have a positive impact on mentees, mentors, and organizations, including improved employee engagement, retention, inclusion, and career outcomes.
As showcased in our Core Values, our People and Education are at the center of our success. The growth and advancement of our team members, through strong mentor and mentee relationships, are an integral part of how we operate at Cray Kaiser, with senior employees taking an active role in career development.
The Mentor Program provides guidance, support and understanding by sharing experiences and knowledge to help employees reach their full potential; a win for everyone.
Weekly Planning on Demanding Schedules or PODS meetings provide a time for staff to check in with their supervisor or manager. These weekly touchpoints are a platform to address training opportunities and promote communication throughout the firm. The PODS also assist in onboarding new staff and allowing them to experience CK with a buddy.
To learn more about these opportunities we provide to employees, click below to hear what teammates Kayla Daniels, Maria Gordon, and Rolake Adedara have to say about mentorship at Cray Kaiser.
