Discussion:Choice of Entity

Client was W2 in 2006 and will be 1099 in 2007 as a consultant. Some internet company set him up as an SMLLC (for $500) but with income of $150,000 to $200,000. I think he definately needs to be a C corp. He needs health insurance, 401k and a vehicle to drive to DC every day (80 miles 1x). So do I tax the LLC as a c corp or does he start over as a corp???

William Price, EA | Portland, OR - Talk to me

I get a difference in tax liability of $8500. As a single SH llc or corp what is the difference in liability?

Tax wise: W2 for 2006 = 65,000. 1099 for 2007 = $150,000. If a SMLLC then all is subject to MC and alot to SS and health insurance and 401k is above the line. As C corp health and 401k and auto are deductible by corp (w/auto on W2). He doesn't need all the new money so thought we'd keep it in the the C corp at 15%. He is single so SMLLC will kill him. If it's a Sub S then all is taxable at his rate.

Also, the mileage may be considered commute. Unless, of course, he spends 5 minutes in the morning checking his e-mail in his home office before heading off to work. And then spends 5 more minutes checking his e-mail when he gets home. :)

If you do go with C or S Corp, you don't need to start over. You would just elect to be taxed as a Corp. Therefore, the $500 he spent would not be entirely wasted.

mileage would be commute but compensable on W2. Office really on site. prob wouldn't want s bc I want to keep 50,000 in c corp for 15%. am I thinking right?

IF I were just beginning why would I want to be an LLC corp rather than a corp? what would be the advantage?

"Another alternative structure is to simply use an LLC taxed as a corporation. An LLC retains all of its state law advantages regardless of how it is taxed for federal tax purposes. Accoringly, an LLC that checks the corporate box on Form 8832, retains it charging order protection."

I am not sure what the state law advantages would be, particularly for your state. Also, some attorneys and tax professionals insist that there really is no "charging order protection". This protection is like having a fire proof safe. You never will know if it works until after you have the fire.

There are a lot of reasons to prefer an LLC over a "real" corporation, even if you do make it a C corporation. Under state laws, corporations have all kinds of mandatory rules -- stock certificates, board minutes, shareholder meetings, officers, etc. If you don't do what you're supposed to, you run the risk that a judge will decide you're not entitled to the benefits of the corporation (liability limitation). With an LLC, you can have simple documents that say the LLC member can do whatever he wants, and that's pretty much it; there won't be a hundred formalities to run the risk of screwing up.

Plus, if you ever decide to make it not a corporation, you can just uncheck the box, instead of having to form a new entity (though the tax results are the same).

so the default is Sch. C filer, unless you check for something else.

All the while, the entity remains an LLC under state law, which means there is no requirement (at least in TX) to maintain minutes/shareholder meetings; a little less formalities involved. And, theoretically, the charging order is maintained with the LLC. However, some may argue the charging order doesn't exist when there is only one Member; from what I've read, the Texas courts are silent on the matter (unless someone knows of a recent case). I'm no lawyer, that's why I refer the client to one to create the entity and the SMLLC or Series LLCs seems to be the popular entity of choice amongst the attorneys. I like them for the reasons I listed. In all honesty, it would be difficult for one member/one shareholder to be completely safe from creditor's reach if there is gross negligence or "egregious acts".

I just realized this post is 6 years old; sweet memories!!