basswood
Atlanta
Just curious as to how you pros set up your business. What motivated you to one over the other or are you neither?
Thanks and best regards,
Tom
Thanks and best regards,
Tom
LLC v. INC?
- Thread starter basswood
- Start date
mrclean81
New member
I'm currently neither but I'm in the process of changing some things and switching to LLC. Years ago when I set my business up, I didn't know everything that I thought I did. I was taking what I now know was bad advise, and set it up as a sole proprietorship, using my SS# as a tax ID. I did get that changed later down the road, and its worked out fine, but when I started looking to raise business capital, I found that banks and other lending companies wouldn't talk to me without having the LLC. If I had taken some business classes or even read a book about it, I would have saved myself a lot of trouble down the road.
triplejumper18
New member
Generally speaking, LLC with Form 8832 to elect to file taxes as a corporation.
basswood
Atlanta
Thanks, guys, for your feedback.
Regards,
Tom
Regards,
Tom
wdmaccord
New member
^^this! Doing the S Corp election will allow the profits to flow to you personally as distribution and taxed at your personal income tax rate (no self-employment tax!!). No tax on the business itself, but you do have to file a return each year (1120S). However, you do need to pay yourself some kind of "reasonable" salary, so you have to know how to withhold payroll/income taxes/unemployment and how/when to file/pay those throughout the year (only on the salary portion). For the distribution portion, you will want to file quarterly estimated income tax. Caveat: I'm not a tax professional. This info is based on my own experience owning an LLC with S-Corp tax treatment.
Mr. Gloss
New member
Sub S is closely scrutinized by the IRS. You will need to declare some income and or dividends.
I'd choose LLC over Sub s, but consult a CPA for accurate info.
I'd choose LLC over Sub s, but consult a CPA for accurate info.
LLC all the protection of a Corp with the tax advantages of a partnership.
Corporations are really designed for large companies with shareholders and different levels of stock ownership.
HOWEVER, you should hire and speak to a CPA becasue everyone's situation is different and laws do vary state to state.
Corporations are really designed for large companies with shareholders and different levels of stock ownership.
HOWEVER, you should hire and speak to a CPA becasue everyone's situation is different and laws do vary state to state.
wdmaccord
New member
A good accountant will properly guide you to make sure you are doing everything correctly to avoid problems with the IRS, or they will handle everything for you if you want. A LLC operating as a Sub S does not pay dividends, that would be a C Corp. Sub S has distributions which pass through to you to be taxed at your personal income tax rate on a Form K-1 (no payroll or unemployment tax). You will have to pay yourself a "reasonable" salary (W-2) and keep track of withholdings, payroll taxes, and unemployment taxes for that portion. The remainder will pass through as a distribution. Again, just my experience with owning a LLC with Sub S treatment. Consult an accountant for specifics in your situation.
It depends on a lot of factors and your goals.
For liability purposes, an entity does not provide any liability protection for the person who causes the harm or negligence. Therefore, if you are working solo without any employees and your hands always do the work, then an entity is worthless for business liability protection. An entity only provides liability protection for the owners of the entity when someone else in the business (like an employee or independent contract) causes harm (Their harm will not cause liability to the owners.).
Also, if you are basically "judgment proof" because you don't have a lot of personal net worth and assets that would be subject in your state to being reached by someone who is harmed from a tort (homes, retirement accounts, etc. are often protected by statute), then you don't have a liability problem to cure. Nobody is going to pay a lawyer to sue someone who has no real assets to get. They win but get nothing. Also, be very careful about getting a lot of business insurance. Lots of insurance can be the pot of money that turns you from being judgment proof to a candidate for a lawsuit. Of course, insurance agents won't tell you this because they are in the business of selling insurance. Trial lawyers look for insurance because it is easy money.
If you decide you need an entity for liability protection, the LLC is usually the entity of choice in most cases for small businesses.
As far as taxes, you have to factor in state taxes as well as federal taxes. Most states put a state income tax on entities (or certain types of entities), so you could be signing up for a new tax for an entity that you don't really need. Paying more taxes for no good reason is not wise.
As far as federal taxes, if you own the LLC by yourself, you will be a "disregarded entity" by default unless you elect to be an association taxable as a corporation on an IRS Form 8832 or a 2553 if you plan on making an S election. A disregarded entity does not exist for federal tax purposes, so your income will flow to your personal income tax return as if you did not have an entity. This is useful for people who want liability protection but don't want to have to pay a CPA for preparing a tax return each year for the LLC.
If you have more than one owner of the LLC, you are a default "partnership" unless you elect otherwise as I noted above.
If you work alone, it would be a hard sell to use an S corporation to escape any employment tax (except for amounts from products or machinery that produces income). If you have others working in your business, then you could pay yourself a reasonable salary (which is subject to payroll tax) and then pay the rest of the profits to yourself as distributions on your stock (which are not subject to payroll tax).
If you want an entity that does the same thing as an S corporation but is scrutinized less than an S corporation, that entity is called a limited partnership. The distributions to limited partners are not subject to self-employment tax (basically the same thing as payroll tax but a different name for non-corporation tax entities and persons).
Most sole proprietors in small businesses (where they do all the work without employees and who do not have a lot of net worth) don't really need an entity and won't benefit from one, but you won't hear many people tell you that because it is sometimes not what the client wants to hear and it is sometimes not profitable for people who set up entities to turn away clients. Be careful about the advice that you get and think about what I wrote above.
I do this for a living (attorney). I may not know much about detailing, but I am an expert in this area. Good luck.
For liability purposes, an entity does not provide any liability protection for the person who causes the harm or negligence. Therefore, if you are working solo without any employees and your hands always do the work, then an entity is worthless for business liability protection. An entity only provides liability protection for the owners of the entity when someone else in the business (like an employee or independent contract) causes harm (Their harm will not cause liability to the owners.).
Also, if you are basically "judgment proof" because you don't have a lot of personal net worth and assets that would be subject in your state to being reached by someone who is harmed from a tort (homes, retirement accounts, etc. are often protected by statute), then you don't have a liability problem to cure. Nobody is going to pay a lawyer to sue someone who has no real assets to get. They win but get nothing. Also, be very careful about getting a lot of business insurance. Lots of insurance can be the pot of money that turns you from being judgment proof to a candidate for a lawsuit. Of course, insurance agents won't tell you this because they are in the business of selling insurance. Trial lawyers look for insurance because it is easy money.
If you decide you need an entity for liability protection, the LLC is usually the entity of choice in most cases for small businesses.
As far as taxes, you have to factor in state taxes as well as federal taxes. Most states put a state income tax on entities (or certain types of entities), so you could be signing up for a new tax for an entity that you don't really need. Paying more taxes for no good reason is not wise.
As far as federal taxes, if you own the LLC by yourself, you will be a "disregarded entity" by default unless you elect to be an association taxable as a corporation on an IRS Form 8832 or a 2553 if you plan on making an S election. A disregarded entity does not exist for federal tax purposes, so your income will flow to your personal income tax return as if you did not have an entity. This is useful for people who want liability protection but don't want to have to pay a CPA for preparing a tax return each year for the LLC.
If you have more than one owner of the LLC, you are a default "partnership" unless you elect otherwise as I noted above.
If you work alone, it would be a hard sell to use an S corporation to escape any employment tax (except for amounts from products or machinery that produces income). If you have others working in your business, then you could pay yourself a reasonable salary (which is subject to payroll tax) and then pay the rest of the profits to yourself as distributions on your stock (which are not subject to payroll tax).
If you want an entity that does the same thing as an S corporation but is scrutinized less than an S corporation, that entity is called a limited partnership. The distributions to limited partners are not subject to self-employment tax (basically the same thing as payroll tax but a different name for non-corporation tax entities and persons).
Most sole proprietors in small businesses (where they do all the work without employees and who do not have a lot of net worth) don't really need an entity and won't benefit from one, but you won't hear many people tell you that because it is sometimes not what the client wants to hear and it is sometimes not profitable for people who set up entities to turn away clients. Be careful about the advice that you get and think about what I wrote above.
I do this for a living (attorney). I may not know much about detailing, but I am an expert in this area. Good luck.
basswood
Atlanta
hwychile,
My son is an attorney in FL and when I posed this question to him, he suggested I research GA laws. To think I paid for his law school...
Thank you so much for your detailed, informative and exceptionally useful reply.
Best regards,
Tom
My son is an attorney in FL and when I posed this question to him, he suggested I research GA laws. To think I paid for his law school...
Thank you so much for your detailed, informative and exceptionally useful reply.
Best regards,
Tom
You're welcome. I am a Texas attorney, so I cannot help with GA state law. Good luck.