What Corporate Structure For A One Man Company

[jyl]

Originally Posted by Shaun @ Tru6

Can you expand on the corporate tax election? It is my understanding that the IRS treats single member LLCs as sole proprietorships.

My understanding is: by default the IRS disregards a single member LLC. But the LLC can elect to be taxed as a corporation by filling an IRS form. This effectively gives the tax advantages of an S-corp, namely the ability to take some part of income as distributions rather than as W-2 pay and thus avoid self employment tax on that part of income. Even though the business is established as an LLC not an S-Corp.

What I'm not sure about is if an LLC has the same ability to create and fund a Solo 401k as an S-Corp does. I think yes but will need to ask the CPA about that.

There is also an issue of whether being an LLC or an S-Corp affects the pass-through income deduction. I think no but the CPA said my planned business (financial services) is a service business that will get little or no pass-through deduction benefit anyway. I am not sure yet if it is "little" or "no".

Hopefully a knowledgeable Pelican will chime in.

I also thought more about location. I decided that I should initially locate where it is most convenient to me, and 2 miles from home is more convenient than 13 miles and in another county or state. The location can be easily changed if that proves necessary for business or tax reasons.

[Shaun @ Tru6]

Interesting stuff, thank you. I'll talk with my accountant.

[jwasbury]

JYL has it right that the default tax classification for an LLC with a single member is Sole Proprietor (schedule C). An LLC can make an election to be taxed as a Corp. This is called a "check the box" election (IRS Form 8832). I believe you'll then need to make an S-election (IRS Form 2553) in order to get to pass through taxation.

If you've determined that Corp form offers advantages, I'm not sure why you wouldn't just form a Corp and make the S-election. What's the advantage to being a legal LLC ultimately taxed as S-Corp over just forming a Corp and making the S election?

[jyl]

What I got from the CPA was:
- S-Corp requires more paperwork and corporate formalities: a board, meetings, minutes. These are kind of a fiction (my word for when one person holds every board seat and meets with himself and takes minutes and moves, seconds, and votes to approve every board decision) but you still have to go through the motions or risk losing the legal protection of the corporate shield. An LLC has fewer formalities to go through, he said. I don't know details, though.
- Should you ever take on a partner, he said an S-Corp has to pay out profits to all owners in proportion to funds invested which may not fit what you want, like if A puts up more money while B does more work. You can adjust for this by having A or B also be employees and use the salary to compensate, but that adds complication. An LLC is more flexible, it can pay profits to members according to whatever agreement they make. I don't think this will make any difference to me.
- An LLC gives you the choice of being taxed as a corporation or a sole proprietorship, and you can switch back and forth, prospectively. A S-Corp is always taxed like a corporation.
- I am not very certain about the effect on using the 20% QBI deduction for pass-through income. I didn't try too hard to understand it, because he said I wouldn't be able to use that deduction because financial services businesses are among those excluded. Shaun, I suspect Tru6 is a kind of business that would be able to use that deduction.
- It is possible to change from an LLC to an S-Corp or vice versa if necessary.
- Passive investors prefer investing in S-Corp to investing in LLC. Supposedly. This does not make any difference to me.

[jyl]

Originally Posted by jwasbury

single member LLC is what I generally recommend to people who are solo practitioners.

while the S-Corp structure can offer some employment tax advantages (pay yourself "reasonable salary" and take the remainder as distribution), you should do the math to see if the extra administrative burden is worth it vs. single member LLC.

Single Member LLC, all you do is file Schedule C attached to your 1040.

S Corp, you will need to file an 1120 annually, plus whatever state filing requirements, and you will need to do payroll tax filings (W-2s, W-3, 940, 941, and/or 944). If you're going to subcontract all that stuff, it may cost more than your tax savings...do the math.

The CPA did say that expected income has to be above a certain level for the cost to be less than the savings on payroll tax. He gave me some numbers but I don't have them handy.