Business Structure Basics

[slim_jim]

thanks for the corrected information. I wonder if the original author would make a correction?

 

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[andviv]

For those new forum members that want to learn more about business structures.... BUMP.

By the way, make sure you read this thread IF one of your new year resolutions is to start your own company.

 

[hatterasguy]

So for building and selling houses, I should form an LLC that is taxed as an S corp.

How about when I start to buy and keep rental properties? Branch them off into another LLC?

When my income goes above $200k a year can I change an S to a C?

 

[hakrjak]

As for how you hold rentals, you'll probably want a master LLC/partnership that will hold other entities that ultimately hold your properties. The number of properties in each entity is dependent on your threshold for risk, the amount of equity in each property, and a host of other factors that you'll have to consider. There's no right or wrong answer.

One thing worth noting, since I have 2 entities myself is that the more entities you have will equal more book keeping costs for you each year. My CPA charges me about $250 per entity to manage all of the books for that entity, handle my annual minutes, keep my binders up to date to keep us compliant, etc.. just in case we're ever called into question by the powers that be. So if I had 10 entities, that would be $2500 per year.

- Hakrjak

 

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[bflbob]

One thing worth noting, since I have 2 entities myself is that the more entities you have will equal more book keeping costs for you each year. My CPA charges me about $250 per entity to manage all of the books for that entity, handle my annual minutes, keep my binders up to date to keep us compliant, etc.. just in case we're ever called into question by the powers that be. So if I had 10 entities, that would be $2500 per year.

- Hakrjak

I wish I could get one that affordably. Mine is $650/year for one entity, just to do the taxes. I do all the accounting myself.

 

[GlobalWealth]

My accountant told me last year (I think) that RE should NOT be held in an S-Corp.

I understand the reason for not holding RE in a C-Corp, but why not an S-Corp??

For asset protection purposes you never want to hold RE in a C or S-corp. It is a bit complicated but essetially if you are sue and a judgement issued against you, you shares in a S or C-corp are at risk. The judgement creditor could take possession of your shares and liquidate the RE to satisfy the judgement. In an LLC (the laws vary greatly by state so not all LLC's are created equal, we use NV, WY, or DE for the best asset protection benefit) the judgement creditors charging order only states that your as your LLC pays distributions to members, the payment must be paid to the creditor to satisfy the judgement. The charging order cannot force a distribution however, nor can it force the sale of an asset, or take possession of your membership interest.

 

[Rem]

I wanted to the bump this thread since i think this is a common topic especially between the New Year and April 15.

I currently run a multi member LLC electing to be taxed as an S Corp for my online business, therefore I do not pay unemployment tax. The one thing I was wondering though was paying estimated quarterly taxes. I have yet to pay in quarterly and just do my taxes yearly and never have had issues or the IRS calling me. Are estimated quarterly taxes only for self employment taxes and that's why I haven't had any issues??

Second big question but I have heard that LLC's can own parts of other LLC's. For instance let's pretend there are 4 members each owning 25% of an LLC. One member decides he/she wants to sell out his share to someone else. I have been told that an LLC can actually buy in and own 25% of that other LLC. So let's say the LLC that bought in was a 2 member 50% each LLC business. That last 25% would then be split among the members of that LLC.

It sounds sort of simple when it comes to structure but I wonder how that would work at tax time. Anyone know what I am talking about? :coco:

 

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[Rem]

Not sure this is correct. If your LLC-taxed-as-an-S-Corp has employees (including yourself), you should be paying FICA and unemployment taxes on all salary paid to employees of the LLC. You can avoid some FICA by paying distributions that are not salary, but this is only over-and-above a reasonable salary.

hmm... ok. You are probably right. Well I need to look into this because I don't consider myself an employee. I just write myself a monthly check based on profits. There are only 2 members and we pay ourselves a bit from the profits each month but don't pay FICA taxes.

You can generally get away with not paying estimated quarterly the first year, but after that, you'll be expected to pay estimated quarterly taxes based either on your previous year's taxable income or your current year's taxable income.

It's been 3 years and I have yet to pay quarterly. I wonder if they know or if they don't know this is happening. I was audited for 2007 this past year and they said I didn't claim some income. I had some checks still coming into the LLC that were under my SS# and not my Business ID number. I gave them proof that in 2007 I did claim them through the LLC and not personally since I chose to be taxed as an S Corp. They said thanks and I was all set.

Yes, an LLC (or corporation) can be an owner in another LLC (or another corporation).

If an LLC (call it LLC 1) with 2 members is 25% owner of another LLC (call it LLC 2), then 25% of LLC 2's income will be distributed to LLC 1. That income will be split up by the members of LLC 1 in proportion to their ownership of LLC 1, and each would be responsible for paying taxes on their portion.

Does that make sense?

This makes complete sense actually. Thanks for breaking it down for me.

 

[Rem]

OK I had to go back and check.

For 2008 I filled out a Schedule E and on line 28 declared the business as a Partnership. Then I filed a Schedule SE for self employment tax. I do these both once per year. Then I filled out the Schedule K-1 (Form 1065)... for my share of the LLC.

I think that is all I do.

Maybe I am toast by the IRS??

 

[Rem]

If you declared as a Partnership and you paid self-employment taxes, you should have the basics covered...

OK good. What about the quarterly filings though? Shouldn't I be doing it quarterly? I remember when I first started it said that I would be notified by the IRS if I needed to file quarterly. I know I shouldn't count on them to let me know but I haven't gotten any notifications. I just don't want to end up getting nailed with some stupid penalty.

 

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[Barry]

Bump

 

[integrity]

Excellent thread! Found it in the afternoon and already filed to register an LLC, soon-to-be-taxed-as-an-S-corp.

I was a little confused about what forms were needed to be filed in order to get S-Corp taxation status, as Diane mentioned two forms (8832 and 2553) while some other online resources just mention 2553. So I did some additional digging around and found some resources that go into detail about that.

CLARIFICATION ON IRS FORM 8832 VS. IRS FORM 2553

• Form 8832- for a business entity (mostly non-corporations) to become taxed in a different class (including an S corp.)
• Form 2553- for a corporation to become an S corp.

All business entities are taxed based on their default classification. Therefore, neither form 8832, nor form 2553, are required unless the business entity wishes to change their current default classification for tax purposes. Form 8832 allows certain business entities (mostly non- corporation classified businesses) to choose what type of classification it would like to be taxed as. While form 2553 allows corporations to become an S corporation, and thereby be taxed as an S corporation. Which form is used depends on the type of business entity that wants to elect a new tax classification.

Addition info on the different options to going from LLC to S corp status (apparently you can just use 8832 in some cases):

OPTION 1: LLC ELECTING TO BE TREATED AS A C CORPORATION (C CORP)
IF YOUR LLC HAS ONE OWNER:
If the LLC has only one owner, the Internal Revenue Service (IRS) will automatically treat the LLC as if it were a sole proprietorship, a disregarded entity, unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832 Entity Classification Election).

IF YOUR LLC HAS MORE THAN ONE OWNER:
If the LLC has two or more owners, the IRS will automatically treat the LLC as if it were a partnership unless an election is made for it to be treated as a corporation. An LLC may elect corporate tax treatment using IRS Form 8832 (Form 8832 Entity Classification Election).

OPTION 2: LLC ELECTING TO BE TREATED AS AN S CORPORATION (S CORP)
An LLC may elect S Corp tax treatment by filing IRS Form 2553 (Form 2553 Election by a Small Business Corporation). However, sometimes the LLC must file both Form 8832 (see Option 1 above) and Form 2553. To determine whether your LLC can file Form 2553 alone, or whether Form 8832 must also be filed, see page 1 of the Instructions to form 2553 or talk with a CPA or LLC attorney in your state.

Links:

http://thompsonhall.com/whos-eligible-irs-tax-form-8832-entity-classification-election/
http://thompsonhall.com/can-an-llc-be-taxed-as-an-s-corp-8832/

Hope this extra info helps.

Thanks again for setting mu up in the right direction!

 

[andviv]

This thread is years old... I wonder how much rules have changed since she wrote this...

 

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[integrity]

This thread is years old... I wonder how much rules have changed since she wrote this...

Yeah, I noticed that.

Although I did look into it quite a bit more, and the LLC with S corp taxation turned out to be the best way to go for me, versus the straight S corp route I was originally considering.

Everything mentioned still looks to check out as current.

 

[CJC3392]

As a 50% CPA (Passed 2 of 4 parts so far ) I would say that mostly everything Diane said is still true..

The bottom line is, if you're starting a business, make sure it's an LLC.

To clarify, as an LLC, you then choose whether to elect to be taxed as a sole proprietorship, limited partnership, s-corp, or c-corp.

The first and most important step is to make sure you're an LLC before worrying about election. The LLC is the greatest thing since sliced bread .

It effectively separates you from your business and creates the coveted veil of protection to the owner, so if shit hits the fan, you're off the hook personally in most cases.

 

[AF77]

Is there anything wrong with filing/reporting a loss the first three years as an LLC?


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[andviv]

Is there anything wrong with filing/reporting a loss the first three years as an LLC?


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Not an expert, but, didn’t Amazon report losses for more than a decade in a row?

 

[biophase]

Is there anything wrong with filing/reporting a loss the first three years as an LLC?


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It could look like a hobby instead of a business.

 

[mitchellwilliam9]

What are your thoughts on the recommended business structures and taxation strategies outlined here? Do you agree that LLCs with specific tax elections are generally a better choice for small businesses, or do you have a different perspective? Share your experiences and insights on business structures and their impact on taxes and asset protection.

 

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