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cocounselor23 · 07-21-2004, 06:58 AM

Tritium-

Good questions. An LLC is very simple to do and you do not need an attorney. However, you may be suprised that the cost of setting up an LLC is not that expensive through an attorney and may give you better peace of mind.

Some Basics:

An LLC is really just a new breed of partnership that gives you individual liability protection, the same protection (more or less) that is afforded to officers, directors and shareholders of a corporation. The LLC is the "hot" form of business entity because relatively simple to form and maintain. For tax purposes an LLC is a "pass through entity," meaning that the income and expenses get reported on your 1040 tax return. The benefit with an LLC is there is no tax at the entity level, as there would be with a C corporation. All income from an LLC is income taxable and you also pay self employment tax (15.3% to social security and medicare). However, you can also deduct all of your expenses and depreciate property placed in the LLC. Most states allow a single member LLC and treat it as a "disregarded entity" for tax purposes, meaning again that evrything is taxable directly to you. An LLC can elect tax treatment as a corporation, but this is uncommon. For the business you are in, I think an LLC would be just fine. You can convert to a corporation later if it makes sense. A lot of people also use LLC's to own and ivest in real estate.

CORPORATIONS

Typical corporations are classified as C corporations, but can also elect Subchapter S status, which provides more favorable tax treatment. However, if you are never going to have dividends or own real estate, a C corporation can be fine. For example, our law firm is a C corporation and that is because all income is paid out as salaries and expenses, so there is never a profit. If a C corporation has profit, it usually pays the profit out as dividends and that is where there is unfavorable tax treatment. What happens is the dividends are taxed at the corporate level and then taxed again to the shareholder receiving the dividend. However, if you elect Subchapter S status, you can avoid this double tax. The difference is that a C corporation has more deductions available to it. For example, health insurance and contributions to a retirement plan are deductible to a C corporation, whereas these may not be deductible to the LLC or S corp. One advantage of an S corp over an LLC is that you can pay part of the income out as salary and part out as dividends and the dividends are not double taxed. The benfit of doing this is best shown by example. Let's say business has $200,000.00 in income that can be paid out. If piad to you under LLC, you will pay self employment tax of 15.3% off the top, which is $30,600, so you now have $169,400.00. Let's say you are in 30% tax bracket for IRS, which results in additional tax of $50,820.00, leaving you with $118,580.00. This does not account for any state tax you may have to pay. If you were an S corp, you could conceivably treat $100k as dividends and $100k as salary. On the dividends, you would probably have to treat as ordinary incolme and if taxed at 30%, you end up with $70k from that part. The $100k will be taxed for self employment at 15.3%, leaving you with $84,700.00. Taxed at 30% for income is $25,410, leaving you with $59,290.00. Combined you end up with $129,290.00, which is better than the $118,580.00 you end up if all is treated as salary under LLC method. Yikes!! I know this gets kind of ugly, but I hope it makes sense.

This are gets fairly complicated and is more than I can really go into here, but based on what you have told me, I would recommend that you start with an LLC. Very easy to form and less formalities than that of a corporation. However, if your clients prefer you to be corporation, consider electing treatment as an S corporation for more favorable tax treatment. Most states have websites at the Secretary of State with additional info that you need, including forms for the Articles of Incorporation of Organization, etc. If you tell me what state you are in, I can get you some additional information.

Hope this helps a little. Please forgive any typos as I have not proofread the foregoing.

07-21-2004, 06:58 AM	#9 (permalink)
cocounselor23 Upright	LLC v. CORP Tritium- Good questions. An LLC is very simple to do and you do not need an attorney. However, you may be suprised that the cost of setting up an LLC is not that expensive through an attorney and may give you better peace of mind. Some Basics: An LLC is really just a new breed of partnership that gives you individual liability protection, the same protection (more or less) that is afforded to officers, directors and shareholders of a corporation. The LLC is the "hot" form of business entity because relatively simple to form and maintain. For tax purposes an LLC is a "pass through entity," meaning that the income and expenses get reported on your 1040 tax return. The benefit with an LLC is there is no tax at the entity level, as there would be with a C corporation. All income from an LLC is income taxable and you also pay self employment tax (15.3% to social security and medicare). However, you can also deduct all of your expenses and depreciate property placed in the LLC. Most states allow a single member LLC and treat it as a "disregarded entity" for tax purposes, meaning again that evrything is taxable directly to you. An LLC can elect tax treatment as a corporation, but this is uncommon. For the business you are in, I think an LLC would be just fine. You can convert to a corporation later if it makes sense. A lot of people also use LLC's to own and ivest in real estate. CORPORATIONS Typical corporations are classified as C corporations, but can also elect Subchapter S status, which provides more favorable tax treatment. However, if you are never going to have dividends or own real estate, a C corporation can be fine. For example, our law firm is a C corporation and that is because all income is paid out as salaries and expenses, so there is never a profit. If a C corporation has profit, it usually pays the profit out as dividends and that is where there is unfavorable tax treatment. What happens is the dividends are taxed at the corporate level and then taxed again to the shareholder receiving the dividend. However, if you elect Subchapter S status, you can avoid this double tax. The difference is that a C corporation has more deductions available to it. For example, health insurance and contributions to a retirement plan are deductible to a C corporation, whereas these may not be deductible to the LLC or S corp. One advantage of an S corp over an LLC is that you can pay part of the income out as salary and part out as dividends and the dividends are not double taxed. The benfit of doing this is best shown by example. Let's say business has $200,000.00 in income that can be paid out. If piad to you under LLC, you will pay self employment tax of 15.3% off the top, which is $30,600, so you now have $169,400.00. Let's say you are in 30% tax bracket for IRS, which results in additional tax of $50,820.00, leaving you with $118,580.00. This does not account for any state tax you may have to pay. If you were an S corp, you could conceivably treat $100k as dividends and $100k as salary. On the dividends, you would probably have to treat as ordinary incolme and if taxed at 30%, you end up with $70k from that part. The $100k will be taxed for self employment at 15.3%, leaving you with $84,700.00. Taxed at 30% for income is $25,410, leaving you with $59,290.00. Combined you end up with $129,290.00, which is better than the $118,580.00 you end up if all is treated as salary under LLC method. Yikes!! I know this gets kind of ugly, but I hope it makes sense. This are gets fairly complicated and is more than I can really go into here, but based on what you have told me, I would recommend that you start with an LLC. Very easy to form and less formalities than that of a corporation. However, if your clients prefer you to be corporation, consider electing treatment as an S corporation for more favorable tax treatment. Most states have websites at the Secretary of State with additional info that you need, including forms for the Articles of Incorporation of Organization, etc. If you tell me what state you are in, I can get you some additional information. Hope this helps a little. Please forgive any typos as I have not proofread the foregoing.