[deleted, i'm an idiot]
Even an LLC with just one person operating it (Which the IRS still sees as a sole-proprietorship I believe) still has their personal assets covered.
You have to do a lot of things right to get that protection.
many disregarded entities, don't
http://www.nolo.com/legal-encyclopedia/personal-liability-pi... :
There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
(You're not an idiot.)
Interesting. Got a pointer to details on that?
Disclaimer: I am not an accountant, nor is my business set up as an S corp.
The way it works is this: you form an S corp, and as the owner you pay yourself dividends rather than straight income. That way you aren't taxed at normal income tax rates but instead at the capital gains rate. At the same time, because you are now an employee of the S corp you personally only pay half the social security tax, rather than the whole bit as you would as the owner of the LLC paying both the employer and employee portions (of course the corporation is still obligated to pay the employer contribution).
Accountants are of different minds on this, depending on their own taste for risk. The important question in an audit is being able to defend that the business is more than just you, IE: the income is legitimate dividends from the success of the business, and not just regular employment income masquerading as dividends. Again, consult an accountant - they really are worth the cost.
As a one-person S-Corp, you run payroll and you are your own employee. You can set your salary, and you can also pay yourself in distributions. Salary is subject to FICA, distributions are not. Both are subject to income tax.
When you pay yourself salary, your "personal" side pays its half of the FICA, and your "business" side pays the other. This is the same way a regular employer/employee relationship works (and why it "feels" like you are paying double FICA when you're self-employed; it's because you are both the employee and the employer).
It used to be that you could severely limit your salary, and pay yourself the bulk of your income through distributions, and lower your tax bill by having lower FICA costs.
These days, it is your responsibility to pay yourself a "reasonable salary", as in something you could reasonably defend during an audit. Once you have paid yourself a reasonable salary (which is subject to FICA), you can give yourself more money (revenue permitting :) ) in distributions.
Also, if your self-employment is part-time, you can pro-rate your salary to reflect that part-time employment.
It's also worth noting that as your business gets successful and long-term, you may want to increase your salary and pay into FICA so you can get a better social security payment when you retire. But still, if you analyze it in a spreadsheet, you'll see that social security, as an annuity, is a "bad deal" when you're paying both sides. (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)
Not for nothing, but as an entrepreneur who has been in exactly the situation contemplated by this scheme: avoiding taxes by structuring your income as a "distribution" rather than salary is shady. I think it's unethical. People that don't happen to run S Corps don't get to do it. I'm prepared to lose the argument, so let me concede it in advance and avoid polluting the thread.
I agree with everything you say here, except this last sentence.
It would be true if the money were coming from a truly external source, but from an economic perspective, this is no different from a "normal" sales or income tax. As a result, it doesn't matter who is nominally paying it - the "real" payer (the incidence of the tax) depends on the relative elasticity of the supply and demand.
As it turns out, empirically, about 95% of the incidence of FICA (if I remember correctly) falls on the employee. In other words, it doesn't matter if the employer is nominally paying for half - they factored that in already when deciding how much to offer the employee when they hired him or her.
For many people reading this thread, Social Security is a bad deal no matter how you look at it - for many people reading this, it will be literally impossible to earn as much back from Social Security as they have paid in (assuming a vaguely realistic life expectancy).
(This is not a political statement, by the way - whether or not one believes that Social Security is good or bad depends on how much value one places on transferring a bit of wealth in order to guarantee a minimum income for the elderly. I just wanted to point out a part of the Social Security calculus that is easy to overlook.)
Most SS taxes are capped just above $100k, and if you own a tech company it's pretty hard to argue you salary should be below that, so the SS angle is limited. But tax free compounding on $51k/yr is a significant benefit.