LLC and taxes.

[HardDrive]

I am going to form an LLC to cover some consulting/construction/property managment work I have been doing. I could see adding employees in the future.

2 questions:

A) I want to avoid taxes as much as possible(don't we all). Is there a disadvantage to having the LLC treated as a corporation for tax purposes?

B) Should I include my wife as a partner? Any reason that I should or shouldn't? She will not be an active participant in the venture. We file a joint return.

[island911]

btdt, don't do it. If you're just one person you don't gain anything but expense and convolution.

iirc, you have to have a separate person (employee) to do your book-keeping.

[berettafan]

go pay for good advice.

that said,
-as an active member of an LLC you will pay FICA on 100% of the net if you file as an LLC.
-if you elect to be taxed as an S corp you mitigate this issue.
-IIRC your wife is a doc of some sort? if so you do not want her as a shareholder/member as any personal liability from her job my jeapordize the assets of your bsns.
-HOWEVER, as a non-active member of an LLC she may be able to have a share of the net without paying FICA which is a good thing. but then we're back to the LLC vs. S corp thing.
-i don't recall offhand which disciplines are considered PSC's by IRS but you will need to look into this issue as part of your entity choice process as well.

See why you need to pay somebody?

[island911]

Yeah,I paid someone to tell me LLC. ...and then paid another guy to tell me why it was a bad idea. (after the fact) :-/

[HardDrive]

Glen, you have an LLC?

[HardDrive]

BTW, the reason I am looking at an LLC is concern over liability. My wife is a physician, and I worry about someone deciding to play 'Go Fish' with the court system. Unless I am grossly misinformed, an LLC provides better legal protection for your assets, yes?

[jwasbury]

Does Washington State law allow for a single-member LLC? Not all states do.

The default federal tax status for a single member LLC is that its a "disregarded entity" and therefore taxed like a sole-proprietor (you file schedule C attached to your Form 1040). I like single member LLCs when possible because the business owner gets the limited liability protection of a corporation, but avoids the extra administrative hassle of filing a stand-alone business tax return. With this structure you will pay self-employment (SE) tax.

With a C-Corp (or LLC with an election to be taxed as a Corp), you won't pay SE tax on the income earned inside the business, but you will pay corporate income tax (and will have the admin hassle and cost of filing a business return). Then you have to consider how you will get your $$ out of the corporate entity. If you choose to pay income out as dividends, you pay individual tax on the dividend income (double tax). You can also pay yourself wages out of the corporation, which is of course deductible expense for the corp, and taxable income to you as an individual. Then you have to withhold employment taxes (FICA and medicare), and file payroll tax returns (Forms 940 and 941), which in my opinion is more of a PITA than just being a sole proprietor and paying the SE tax when filing your 1040.

S-Corps eliminate the double tax problem on dividends, but theoretically you cannot pay yourself only dividends out of an S-Corp when you are actively involved in the business. The IRS will want to see you pay yourself at least some "reasonable" amount of wages if you're providing services to your corporation. A lot of people think they will avoid employment tax by not paying themselves wages out of S-Corps, and perhaps you can so long as you're not audited.

IMHO unless you expect this thing to get big, the best thing is to follow the K.I.S.S. principle. Schedule C - sole proprietor, with a single member LLC for liability protection if your state allows this.

[911Freak]

[QUOTE=HardDrive;5173572]BTW, the reason I am looking at an LLC is concern over liability. My wife is a physician, and I worry about someone deciding to play 'Go Fish' with the court system. Unless I am grossly misinformed, an LLC provides better legal protection for your assets, yes?[/QUOTE

We formed a LLC for an added layer of protection against litigation, liability and other issues concerning our investment properties. (self directed IRA which owns investment property) One of my investment partners turned my on to a great attorney who explained all the benefits and tax liabilities for CA. WA may differ.


I like the LLC structure and echo the suggestion consult a good attorney in WA who specializes in R/E to explain the differences of S corp etc.


Good Luck HD

[berettafan]

to clarify i am taking 'property management' as a trade, not actual ownership of property.

if you intend to own real estate then you go back to the LLC thing.

just go pay somebody.

[Seahawk]

I have an LLC for the farm and horse boarding operation (mainly for legal separation of personal and business), have been a member of numerous LLC's for investment purposes (real estate) and currently am a Director/Owner of yet another LLC.

Each is different in both structure and intent. The best advice I ever received and followed was from an retired Marine Corps MGEN who I am good friends with. He has, like I do, numerous interests, including a consulting firm and a vineyard in Virginia and told me this: Find an accountant who is also a lawyer, that way you won't get billed twice.

I use his. Amazing guy...Ben Stein without a personality.

As to adding an employee, that is a whole other issue, one that needs to be carefully considered from any number of angles, including the insurance perspective. The best method for bringing on folks is to 1099 them...no muss, no fuss but no stability in the workforce.

Find a lawyer/CPA: Chat.

[red-beard]

I would talk to an attorney and a CPA.

We initially were going to open as a C-corp but converted to an S. LLC didn't do what we wanted and we ended up with the self employment taxation issues.

Our corp is owned by 2 people, and they pay taxes together. This is "perfect" for an S-corp. C corp when you need investment money or have many investors with different kinds of investment.

From what I read, I think an S-Corp will do what you need. And your wife can be 60% owner, and you are now a minority/woman owned business.

[drcoastline]

HardDrive-

Jwasbury gave great advice. I am a member of 2 person LLC I have an LLC of which I am the only member and I am the President of an (S) Corp.

LLC's give liability protection as if you are Incorporated but all tax filings are done as a sole proprietor.

Jwasbury hit the nail on the head when it comes to (S) Corps. The only thing I would add to that is all profits from the (S) Corp are looked at as income to you personally and the income gets applied on your personal taxes. Sp depending on the business profits you may get bumped into a higher tax bracket.

[HardDrive]

Thanks guys.