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Way way O.T. LLC or S Corp??

Discussion in 'Uncategorized Threads' started by quicky, Apr 8, 2008.

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  1. quicky

    quicky Member

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    I am planning on putting a little machine shop in a bldg. to the side of my house and doing some machine work on the side. It could evolve into something fulltime with retirement not that far off. 37 years and I still like doing this stuff!

    My question revolves around whether an 'S' Corp. or an LLC is the best route to go when I 'open the doors' to the outside world, so to speak. I think it is a shame that whenever we contemplate a financial move in America our first question involves taxes and liabilities. This will be a one-man show with no thoughts on expanding so no shares and such goodies.

    Thanks in advance, Quicky
     
  2. jevoliva

    jevoliva Member

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    A second for LLC
     
  3. 3DHC

    3DHC Member

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    I went with a S Corp for my consulting business.

    It cost about $2.5k in attorney fees to set up in California. I have a couple of shareholders besides myself but I am essentially the only employee. The accounting is done on a cash basis and generally most of the excess cash beyond initial investment is spent at year end in bonus and distribution. The distribution is based on shareholder equity. Taxes are mostly a pass through and paid by the shareholders based on the distribution amount and any movement in retained earnings. I have access to a related business accounting staff that keeps my books. You would be amazed at all the state and federal forms that must be filed and paid monthly.

    I would suggest that you first speak with a CPA about your business and obtain their advice on the administrative burden associated with maintaining LLC's and S-Corps. If you have never had your own business, you are in for a big surprise.

    Good Luck
     
  4. Dickgshot

    Dickgshot Well-Known Member

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    An LLC is much simpler because it requires no extra tax filings. A one man LLC is generally treated as a "disregarded entity" which means for tax purposes that you file the same as you would for an sole proprietorship on Form 1040, Sch. C.


    A Sub-S corporation requires a extra form 1120-S, and you're required to show a salary, so that means quarterly forms 941, state unemployment, state withholding..well, you get the idea. The benefit of a Sub-S is that the part of your earnings that are not shown as salary are not subject to Social Security tax.
     
  5. tj303

    tj303 Member

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    "The benefit of a Sub-S is that the part of your earnings that are not shown as salary are not subject to Social Security tax" Which is 15% !!!
     
  6. smp005

    smp005 Member

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    For a one man show it really depends on the amount of $$$ you expect to be pulling in. Everyone is rigth about only paying SS Tax on your salary, not all the corp earnings but don't think you can get away with paying yourself 20k an year and taking 80k in distribution - the salary has to be "reasonable"... Which means if your only expecting to pull in 25k-35k per year initially it may not be worth the hassles. Yes, you can depreciate equipment and write off expenses, but believe me - the minute you incorporate every pathetic little government entity has their damn hand out!! It may not be just Federal & State tax. I have capital property tax to the county, umemployment, workers comp and the new Ohio tax: Corporate Franchise Tax!!!! Even if you don't have to pay, YOU HAVE TO FILE - which means paying your accountant for more forms.......

    And god help you if you are late on your 941 payments - even a day!

    No real liability protection - they will come right thru an S-Corp to the owner if they so desire...

    I'm not trying to scare you off - I love owning my own company and wouldn't have it any other way, but you have time before making this decision.. Focus on getting your business up and running - worry about LLCs and S-Corps later....

    Scott
     
  7. motordoctor

    motordoctor Shoji Tabuchi in Branson

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    The llc gives you the corporate vail for liability which is the real thing you are looking for. Many states you can file the papers on the internet and do not need legal help for doing that work. An attorney in Ohio wants 500 bucks to form an LLC and I did it on the web for 125.00. Real savings. Motordoc
     
  8. smp005

    smp005 Member

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    Hey Motordoc!

    Haven't seen you at Copley in awhile!

    Scott
     
  9. quicky

    quicky Member

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    Thanks a bunch everyone. Just aren't a bunch of real clear-cut answers are there?

    I hear promoters on the radio and elsewhere talking of all the advantages of incorporating; writing off corporate board meeting in Hawaii and such (husband and wife board members), various ways to purchase vehicles and appliances and write them off, etc. I suspect the IRS tentacles are pretty extensive when it comes to bank oversight and money movement. (Think Eliot Spitzer).

    I did have an accountant tell me not to declare income or expenses on hobby type businesses until income approaches or exceeds 10K annually. He said it is easier to just ignore it, then if the IRS comes to pay a visit it is pretty easy to come up with enough deductions to negate that small amount of income.

    I think I'll play it straight-up and sleep better for it. Maybe not richer but better.

    A person I know had a car wash which is an all cash type business and he wasn't too careful with receipts. It was difficult for him to sell when he wanted to move on because of the ROI questions the bank for the purchaser wasn't able to get good answers on. So, it all comes around sometime I suppose. Anyway, this was over 20 years ago so I suppose it has all been sorted out by now.

    The toughest question for me to answer now is about conflict of interest with my current employer. Doing work for them will create a conflict of 'perception' with other employees. If I suggest to a competing company that such-and-such a way of making something would be more economical in the long run, this is the way we do it across the street from you and it works much better for us, then I run afoul of conflict of interest rules from my place of employment. All things to be sorted out. I have 26 years with my current employer and would like to make it to 30 for some odd reason. Just need a little something to do to break the monotony.

    Thanks again, Quicky
     
  10. phirel

    phirel TS Member

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    I very strongly agree with Scott. First, get the business running, make a little money and then get some sound advice on the best way to set up the business on paper.

    I have four sub S corps based on advice from my CPA. They can offer some tax advantages but very little liability protection. The corporate liability shield is made from paper. The worst lawyer can break through this shield easily.

    Setting up an S-Corp in Virginia is very simple. It does not require a lawyer and the fees to the State are rather low. Write to the State Corp. Commission for an application and see what is required.

    Pat Ireland
     
  11. alf174

    alf174 Member

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    Having been active in both and especially if you are the single partner, go LLC. Accountants can charge more for S-corps because the reporting requirements are greater.
     
  12. dmarbell

    dmarbell Active Member

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    LLC is my state (NC) pays $200 annual fee. Minimum S-Corp franchise tax and annual report fee is $60.

    All LLC net earnings are subject to self-employment income and, therefore, self-employment taxes (social security). LLCs can have unequal distributions of profits, if done right. Single-member LLCs have no advantage there.

    S-Corp can pay a reasonable salary, and excess earnings are not subject to self-employment income rules. S-Corp has separate return to file, but with assets and income under $250k, no balance sheet is required, so it's relatively simple to complete.

    Either provide a level of protection if operated as separate businesses and funds are not co-mingled with personal funds and expenses. Any asset protection veil can be penetrated, but LLCs and S-Corps make it harder.

    I like S-Corps because of the self-employment tax issue. LLCs are in vogue, though, and advisors jump on the band wagon.

    If you are going to make less than about $100k, there is no practical difference, in my opinion. The extra fee for LLC filing might be saved by not having to file an S-Corp separate return.

    One other issue. Let's say you think you are going to make $50k, and pay yourself a salary of $50k from an S-Corp. If you only make $40k, you would have $50k salary and a $10k loss, for a net of $40k. However, you paid SS Tax on the $50k, and the loss doesn't offset it. In an LLC, you would only pay self-employment and income tax on the $40k.

    $100-200 consulting fee with a good CPA or Attorney is probably what you really need.

    Danny
     
  13. JDinTX

    JDinTX Member

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    I agree with Pat above. I have an LLC per advice of my accountant, but I did not in the beginning. Start the Business, make some money, THEN get a CPA to set you up an LLC. LLC is the way to go, pass through taxation and no extra filings. JD
     
  14. quicky

    quicky Member

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    Thanks again for all the help. I do appreciate the great advice, Quicky
     
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