Understanding tax differences: Starting a default MMLLC vs S-corp MMLLC for escape room business

I'm planning to open an escape room in upstate New York with 3 partners, and I'm trying to figure out the best business structure from a tax perspective. For context, all 4 of us make decent money at our day jobs (between $150-250k yearly). From what I've researched so far about multi-member LLCs (MMLLC): -A default MMLLC means we'd pay both personal income tax AND self-employment taxes on all profits the escape room makes. -An MMLLC with an S-corp tax election gives us different options: ---Option 1: If the escape room is profitable but we don't take salaries or distributions, the profits would pass through to our personal returns, but we'd avoid self-employment/payroll taxes ---Option 2: If we pay ourselves "reasonable compensation" salaries, any additional profits could be distributed without the 15.3% self-employment/payroll tax (though we'd still pay income tax on everything) Have I understood these tax strategies correctly? Also wondering if there are special tax considerations with an MMLLC vs S-corp if one of our partners lives in Connecticut while the escape room will operate in New York? Thanks for any guidance!

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18 comments

Omar Fawaz

•8M

You've got a pretty good understanding of the tax differences between a default MMLLC and an MMLLC with an S-corp election! For a default MMLLC, you're correct that all profits flow through to your personal returns and are subject to both income tax and self-employment tax (the 15.3% for Social Security and Medicare). For an MMLLC with S-corp election, your understanding is mostly right, but let me clarify: - Option 1 isn't quite accurate - even without taking salaries or distributions, the IRS expects S-corp owners who provide services to take "reasonable compensation" as W-2 wages. You can't completely avoid payroll taxes if you're actively working in the business. - Option 2 is spot on! This is the main tax advantage - paying yourself reasonable W-2 wages (subject to payroll taxes) and taking remaining profits as distributions (not subject to self-employment tax). For your multi-state question, it gets a bit complicated. The MMLLC will file in the state where it operates (NY), but owners will need to file nonresident returns in NY for their share of business income plus resident returns in their home states. The S-corp election doesn't change this filing requirement, but can affect how certain states tax the income.

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Omar Fawaz

•8M

Starting as a default MMLLC and converting later is often a good approach, especially for new businesses. In the early stages when you're likely reinvesting profits or possibly operating at a loss, the S-corp benefits are minimal and not worth the additional compliance requirements (payroll processing, reasonable compensation documentation, etc.). Once your escape room becomes consistently profitable and generating enough income that the self-employment tax savings outweigh the additional compliance costs (typically when profit exceeds $40,000-$50,000), that's when converting to S-corp taxation makes sense. The good news is this is just a tax election - you keep the same LLC legal structure but file Form 2553 to elect S-corp taxation when the time is right.

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Diego Vargas

•8M

I've been using taxr.ai for my small business tax planning and it was super helpful for understanding these exact issues with my LLC. I started a food truck last year and wasn't sure about the whole S-corp election thing. I uploaded my financial stuff to https://taxr.ai and it analyzed everything and showed me exactly when making the S-corp election would make sense for my specific situation. What I liked is that it didn't just give generic advice - it actually ran the numbers based on my profit margins and showed me that I needed to be making around $45k in profit before the S-corp savings would outweigh the hassle. It even generated the right forms I'd need to file when I hit that threshold.

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Diego Vargas

•8M

It absolutely helped with the reasonable compensation question. It analyzed compensation data for similar businesses in my area and gave me a suggested salary range based on my specific role and time commitment. This was huge because I was worried about either overpaying myself (losing tax benefits) or underpaying (raising audit flags). For the multi-state issues, it actually did address this. The tool flagged that I had operations in multiple states and provided state-specific guidance for my situation. It showed which states would require me to file returns and how the income would be apportioned. It even highlighted some specific quirks with my state combination that I wouldn't have known about.

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StarStrider

•8M

OK I need to eat my words about being skeptical of taxr.ai. I decided to try it after responding here and wow - it was actually super helpful for my rental property business. I've been struggling with whether to keep it as a Schedule E thing or form an LLC with S-corp election. The analysis it gave me was way more detailed than what my accountant provided (sorry, Dave). The tool found some specific deductions I was missing and showed me exactly how different business structures would affect my bottom line over the next 5 years. It even created a custom tax timeline showing me when it would make sense to switch structures as my properties scale up. The multi-state guidance was spot-on too since I have properties in two different states. Definitely worth checking out for anyone in a similar boat to the OP trying to figure out business structures.

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Sean Doyle

•8M

If you're having trouble figuring out the LLC vs S-corp thing, you might also run into issues dealing with the IRS directly if you need help. I wasted 3 DAYS trying to call the IRS business line to get some clarification about S-corp election timing. Then I found Claimyr https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c and it completely changed the game. They basically hold your place in the IRS phone queue and call you when an agent is about to pick up. I got through to a business tax specialist at the IRS in under 45 minutes when I had been trying for days before. The agent walked me through the exact timeline and requirements for my S-corp election and cleared up my confusion.

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Sean Doyle

•8M

It's not that they put you at the front of the queue - they just wait in the queue for you. The system calls the IRS and navigates the phone tree, then waits on hold. When an agent is about to pick up, it connects you directly to the call. You're still waiting your turn, just not actively sitting there listening to hold music for hours. The IRS doesn't disconnect because you ARE on the line when they answer - the system bridges you into the call right before an agent picks up. It's completely legitimate and doesn't try to "skip" the line or anything shady. It's just a more efficient way to deal with those ridiculously long hold times. I was skeptical at first too, but I was desperate after wasting so much time trying to get through myself.

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Luca Romano

•8M

I need to follow up on my skeptical comment above about Claimyr. I actually tried it after posting here because I was desperate to talk to someone at the IRS about my S-corp election that I messed up. I'm genuinely shocked it worked so well. I had been trying for literally 3 weeks to get through to someone who could help me. Used Claimyr yesterday and got connected to an IRS business tax specialist in about an hour. I didn't have to sit on hold - their system just called me when an agent was about to pick up. The IRS agent was super helpful and cleared up my confusion about filing deadlines for my MMLLC's S-corp election. Saved me from potentially missing important deadlines. Just wanted to admit I was wrong in my skepticism.

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Nia Jackson

•8M

One thing nobody has mentioned yet about MMLLC vs S-corp - operating agreements are SUPER important, especially with 4 partners. Make sure you have detailed provisions for: - How profits/losses are allocated (doesn't have to be equal to ownership %) - What happens if someone wants out - Management responsibilities and voting rights - Capital contribution requirements My brother-in-law's multi-member LLC imploded because they didn't have this stuff spelled out clearly. The tax structure matters, but the operating agreement will save you major headaches.

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Nia Jackson

•8M

I would absolutely recommend getting a specialized business attorney for this. Templates are a starting point, but with four partners and potentially complex profit-sharing arrangements, you need customization. The attorney cost us about $1,500 for a solid operating agreement, but it was worth every penny. For your escape room business, you'll want specific provisions that address how to handle capital-intensive improvements, marketing expenses, and the sweat equity some partners might contribute versus purely financial investments. The attorney can also help structure things to maximize the tax benefits whether you go MMLLC or S-corp route. Think of it as insurance against future partner disputes.

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Mateo Hernandez

•8M

A practical tip from someone who runs 2 escape rooms: regardless of whether you go MMLLC or S-corp, set up good bookkeeping from DAY ONE. Our first year was a nightmare at tax time because we mixed personal and business expenses and didn't track properly. QuickBooks Online worked well for us, but there are cheaper options like Wave that are good too. Just make sure you're categorizing everything correctly and keeping good records of all your startup costs (which can be substantial for escape rooms with all the props and tech).

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