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So in a nutshell, LLC = less taxes VS Self Employed?

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luniac

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I may need to create an LLC this year and am a bit confused on the

"Pass Through" feature of S-Corp and generic LLC.

if the profits pass through to you as an individual, won't the tax rate be equal to self employment tax rate?

so besides the Limited Liability benefits of owning an LLC, there are no real income advantages?
besides maybe business cost write offs like equipment and that type of stuff?
 

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As an LLC owner and operator, you are still subject to self-employment tax. In fact, if you are a single-member LLC, your LLC will show up on the Schedule C of your tax return just like a sole-proprietorship would.

Any business expense can be written off, no matter what your entity type. As long as the money was used for business, and the expense is "ordinary and necessary" then it can be deducted.

The real tax-savings start to come into effect when you can convert to an S Corp, which requires you to take a "reasonable salary," and you can avoid self-employment taxes on amounts above that salary.

There are the more traditional tax-savings vehicles (401ks, IRAs, HSA and health insurance, etc), but those are not entity-dependent.
 

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As an LLC owner and operator, you are still subject to self-employment tax. In fact, if you are a single-member LLC, your LLC will show up on the Schedule C of your tax return just like a sole-proprietorship would.

Any business expense can be written off, no matter what your entity type. As long as the money was used for business, and the expense is "ordinary and necessary" then it can be deducted.

The real tax-savings start to come into effect when you can convert to an S Corp, which requires you to take a "reasonable salary," and you can avoid self-employment taxes on amounts above that salary.

There are the more traditional tax-savings vehicles (401ks, IRAs, HSA and health insurance, etc), but those are not entity-dependent.
I don't want to hijack or get too in-the-weeds here, but what do you do with leftover profits in your S-Corp designated company, assuming you either don't want to keep profits in the entity for some reason or you need more than your basic salary to live on? Would you issue them to yourself as a dividend and pay a capital gains tax on them instead of an income tax? Or would it just be best to give yourself the salary level that you actually need, thereby increasing your personal income tax bracket?
 

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I don't want to hijack or get too in-the-weeds here, but what do you do with leftover profits in your S-Corp designated company, assuming you either don't want to keep profits in the entity for some reason or you need more than your basic salary to live on? Would you issue them to yourself as a dividend and pay a capital gains tax on them instead of an income tax? Or would it just be best to give yourself the salary level that you actually need, thereby increasing your personal income tax bracket?
You could pay them to yourself as a distribution. Since you're taxed when the money is earned (hence the "passthrough" designation), there is no tax on this distribution.
Here is a post that I need to update for the 2018 tax changes: A-M-A - US-Based Taxes/Business Formation (CPA)
 
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luniac

luniac

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so wats stopping me from giving myself a "reasonable" salary of say 100k, and the S-Corp profit is 1.1 million and I distribute the 1 million to myself tax free?

Also what about things like establishing LLC in Delaware which has the feature of no tax on out of state earnings, does this mean I wouldn't need to establish a salary and just keep the LLC profits tax free if I make the money outside Delaware?

or hell even Nevada which I believe doesn't tax any business profits at all?
 

CareCPA

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so wats stopping me from giving myself a "reasonable" salary of say 100k, and the S-Corp profit is 1 million and I distribute the 1 million to myself tax free?
The remainder is not tax free. It is taxed at your normal income tax levels, it's just not taxed for self-employment.
And if you can accomplish this level of profitability, you may want to start some more sophisticated tax plans.

Also what about things like establishing LLC in Delaware which has the feature of no tax on out of state earnings, does this mean I wouldn't need to establish a salary and just keep the LLC profits tax free if I make the money outside Delaware?

or hell even Nevada which I believe doesn't tax any business profits at all?
Most states will still drag you in, which is why I'm confused when e-commerce people open their LLC in Wyoming or Nevada. Your home state is still going to get their slice of the pie if you are a passthrough entity (you can see this by the fact that most states start their tax form with your Federal Adjusted Gross Income).
Multi-state taxation is a complicated area, so take this at face value.
 
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luniac

luniac

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The remainder is not tax free. It is taxed at your normal income tax levels, it's just not taxed for self-employment.
And if you can accomplish this level of profitability, you may want to start some more sophisticated tax plans.


Most states will still drag you in, which is why I'm confused when e-commerce people open their LLC in Wyoming or Nevada. Your home state is still going to get their slice of the pie if you are a passthrough entity (you can see this by the fact that most states start their tax form with your Federal Adjusted Gross Income).
Multi-state taxation is a complicated area, so take this at face value.
damn this stuff gets confusing. I live in NYC and was thinking of doing Delaware LLC like everyone else.
 

CareCPA

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damn this stuff gets confusing.
It does.
NY, for example, says:
"But every partnership having either (1) at least one partner who is an individual, estate, or trust that is a resident of New York State, or (2) any income, gain, loss, or deduction from New York State sources, must file a return on Form IT-204, regardless of the amount of its income"
This is for an LLC taxed as a partnership.

The individual return starts with Federal income. You can then apportion income out of NY if relevant.
However, you must apportion to NY "sales made, or services performed, by or through an agency in New York State. This includes sales made or services performed by employees, agents, agencies, or independent contractors situated at, connected with, or sent out from offices of the business (or its agencies) located in New York State. For example, if a salesman working out of the New York office of the business covers New York, New Jersey and Pennsylvania, all sales made by him are to be allocated to New York State and included in Column B on line 6"
 
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luniac

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It does.
NY, for example, says:
"But every partnership having either (1) at least one partner who is an individual, estate, or trust that is a resident of New York State, or (2) any income, gain, loss, or deduction from New York State sources, must file a return on Form IT-204, regardless of the amount of its income"
This is for an LLC taxed as a partnership.

The individual return starts with Federal income. You can then apportion income out of NY if relevant.
However, you must apportion to NY "sales made, or services performed, by or through an agency in New York State. This includes sales made or services performed by employees, agents, agencies, or independent contractors situated at, connected with, or sent out from offices of the business (or its agencies) located in New York State. For example, if a salesman working out of the New York office of the business covers New York, New Jersey and Pennsylvania, all sales made by him are to be allocated to New York State and included in Column B on line 6"
jesus Christ...
 

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@luniac - it's worth noting that many major companies choose to incorporate in Delaware because of a long history of legal precedence that favors businesses. It's not for tax purposes; it's for when you get sued or need to sue.
 

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I don't want to hijack or get too in-the-weeds here, but what do you do with leftover profits in your S-Corp designated company, assuming you either don't want to keep profits in the entity for some reason or you need more than your basic salary to live on? Would you issue them to yourself as a dividend and pay a capital gains tax on them instead of an income tax? Or would it just be best to give yourself the salary level that you actually need, thereby increasing your personal income tax bracket?
@CareCPA said it well, but just to reiterate... For any pass-through entity (sole prop, LLC taxed as partnership, LLC taxed as S-Corp, S-Corp), taxes are passed through to the individual and the individual pays the taxes on the income earned by the company. Because of this, it doesn't matter if you leave the income in the company, if you distribute it out to the owners, if you withdraw it and set it on fire, etc. -- you pay the tax personally and you can do anything you want with that money.

This is unlike C-Corps (or LLCs taxed a C-Corps), where the business is considered to be it's own entity for tax purposes. Any net income in the business is either paid as salary to owners (in which case the owners get a W2 and pay taxes, just as if they were paid from any other job), is paid as a dividend to shareholders (in which case the shareholders get a 1099 and pay taxes) or is retained in the company (in which case, the company pays corporate income tax). Any income on which the company pays corporate income taxes is retained in the company until it is used for investment/expenses, paid as salary or paid as dividends in the future. If it's ever paid as salary or dividends, the income is then taxable a second time by the individual getting the benefit of the salary or dividend. Hence the idea of "double taxation" for C-Corps.

Hopefully that clarified, and didn't just confuse you more... :)

[Also note that I'm not a tax professional, so please don't rely on anything I have to say on the topic.]
 
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luniac

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@CareCPA said it well, but just to reiterate... For any pass-through entity (sole prop, LLC taxed as partnership, LLC taxed as S-Corp, S-Corp), taxes are passed through to the individual and the individual pays the taxes on the income earned by the company. Because of this, it doesn't matter if you leave the income in the company, if you distribute it out to the owners, if you withdraw it and set it on fire, etc. -- you pay the tax personally and you can do anything you want with that money.

This is unlike C-Corps (or LLCs taxed a C-Corps), where the business is considered to be it's own entity for tax purposes. Any net income in the business is either paid as salary to owners (in which case the owners get a W2 and pay taxes, just as if they were paid from any other job), is paid as a dividend to shareholders (in which case the shareholders get a 1099 and pay taxes) or is retained in the company (in which case, the company pays corporate income tax). Any income on which the company pays corporate income taxes is retained in the company until it is used for investment/expenses, paid as salary or paid as dividends in the future. If it's ever paid as salary or dividends, the income is then taxable a second time by the individual getting the benefit of the salary or dividend. Hence the idea of "double taxation" for C-Corps.

Hopefully that clarified, and didn't just confuse you more... :)

[Also note that I'm not a tax professional, so please don't rely on anything I have to say on the topic.]
that was very clear, seems you're screwed any way you slice it.

there's no way to avoid the crazy high tax rates that go with very high incomes?

I guess sticking money in offshore bank accounts is the only way to go lol!
 

CareCPA

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that was very clear, seems you're screwed any way you slice it.

there's no way to avoid the crazy high tax rates that go with very high incomes?

I guess sticking money in offshore bank accounts is the only way to go lol!
There are some. @GlobalWealth specializes in international structuring for minimizing taxes (please correct me if I've mis-characterized this). It all depends on your goals and lifestyle.
 

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@luniac - it's worth noting that many major companies choose to incorporate in Delaware because of a long history of legal precedence that favors businesses. It's not for tax purposes; it's for when you get sued or need to sue.
There are a few reasons some go with DE for their structure.

One, as you noted is legal precedence that favors businesses. From a liability standpoint, this can be attractive to some.

Another, DE has no state sales tax so if you have a virtual business without any state nexus, this could be attractive as you would not need to collect and pay state sales tax. Of course, there is now a war for state sales tax and this is in jeopardy.

Lastly, due to DE favorable legal precedence, many lenders look favorably at DE companies and "may" be more inclined to offer business credit for DE registered companies. I have a lot of clients where we have registered DE LLC's solely for this purpose.

However, the above notes are not a sales pitch for DE. If your business has nexus in a state, it's probable that you will need to register your company in that state, or at least register your company as a foreign entity in that state. Some states are lax on this, some not. CA is the most diligent in making sure you are registered in the state if you have nexus.

Determining the proper structure for your business is not always a simple question, especially in the past several years where more and more entrepreneurs are working remotely, outsourcing their employees/contractors and allowing for remote work, virtual companies, international client base, global ecommerce, etc.

My view is when you are starting out, the number one goal for your business is making that first $1. Then figuring out how to duplicate that process.

Once you've sorted that out, now's the time to get your structure in order. And unless you understand the complexities of this type of planning, just going on your home state company registry to set up an LLC is not a great idea. It "may" be what you need, or there may be much better options.
 

GlobalWealth

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There are some. @GlobalWealth specializes in international structuring for minimizing taxes (please correct me if I've mis-characterized this). It all depends on your goals and lifestyle.
Yes, you are correct. My primary business is in company formation and proper structuring for asset protection and tax minimization.
 

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there's no way to avoid the crazy high tax rates that go with very high incomes?

I guess sticking money in offshore bank accounts is the only way to go lol!
Depends on what you mean by "very high incomes" and the type of income you're generating. If you're making at least $200K, a C-Corp can be a great way to reduce tax liability for many types of income, and can provide other owner benefits and deductions as well.

If you are an "accredited investor" -- meaning you have at least $200-300K of annual income or a net worth of at least $1M -- there are likely other tax shelters available to you as well. For example, syndicated Conservation Easements have gotten a bad rap the past couple years (lots of shady providers), but if you work with a reputable provider, you can reduce your effective tax rate by 10% or more using shelters like this.

I've found that the more money I make, the easier it is to shelter it from taxes using strategies I hadn't previously considered. And I imagine for those who are really wealthy, they are able to use strategies I can't even imagine.
 

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I've found that the more money I make, the easier it is to shelter it from taxes using strategies I hadn't previously considered. And I imagine for those who are really wealthy, they are able to use strategies I can't even imagine.
I have a few clients who set up defined benefit plans for their businesses. One of my clients who is a doctor and a partner in a larger practice did this. We created a professional LLC where the firm would pay all of his earnings.

With this professional LLC we set up a defined benefit plan with him as the sole contributor. He earns high 6 figures and puts about 250k/year, tax deferred (like an IRA but with MUCH bigger contribution limits) into his DB plan.

From there, his DB plan "bought" an offshore entity (the DB plan is 100% shareholder of the entity). With several hundred thousand in the account, he is now buying foreign real estate.
 
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luniac

luniac

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Thanks for the info guys.
As globalwealth said, I understand its about making that first $1 and worry about forming a company when it's time.

The only reason I'm researching this more now is because I may have an opportunity to publish an app in collaboration with a public figure, and the iOS appstore does not allow the use of a fictitious company name and thus forces me to use my real name.
That doesn't really gel with publishing an app for a public figure, so I may have to establish an LLC. No rush though.
 

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I have a few clients who set up defined benefit plans for their businesses. One of my clients who is a doctor and a partner in a larger practice did this. We created a professional LLC where the firm would pay all of his earnings.

With this professional LLC we set up a defined benefit plan with him as the sole contributor. He earns high 6 figures and puts about 250k/year, tax deferred (like an IRA but with MUCH bigger contribution limits) into his DB plan.

From there, his DB plan "bought" an offshore entity (the DB plan is 100% shareholder of the entity). With several hundred thousand in the account, he is now buying foreign real estate.
And this is why, when you're making real money, it's worth paying a professional who specializes in this area.
 
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luniac

luniac

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I guess the real question is, if I establish an LLC now due to my circumstances, would it be complicated for me to later recreate the LLC if necessary?
I was gonna go with legalzoom and do the quick cheap option.
 

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JScott

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I guess the real question is, if I establish an LLC now due to my circumstances, would it be complicated for me to later recreate the LLC if necessary?
I was gonna go with legalzoom and do the quick cheap option.
What do you mean "recreate?" If you create the LLC now, it's created, and in existence until you dissolve it or fall out of compliance with your state.
 

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What do you mean "recreate?" If you create the LLC now, it's created, and in existence until you dissolve it or fall out of compliance with your state.
I think his question is more about whether he can change the state his LLC is registered with. For example, if I create an LLC in CA just so I can get started, but once the ball gets rolling determine DE makes more sense, can I move the LLC, or does it need to be dissolved in CA and filed as a new LLC in DE?
 

JScott

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I think his question is more about whether he can change the state his LLC is registered with. For example, if I create an LLC in CA just so I can get started, but once the ball gets rolling determine DE makes more sense, can I move the LLC, or does it need to be dissolved in CA and filed as a new LLC in DE?
LLCs are state regulated and defined (there is no federal statute governing the existence of LLCs). So, if you create an LLC in one state and want to move it to another state, you need to start over.

That said, you can change the name of the entity any time, you can change the tax structure and you can create DBAs for existing LLCs without starting over.
 
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luniac

luniac

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LLCs are state regulated and defined (there is no federal statute governing the existence of LLCs). So, if you create an LLC in one state and want to move it to another state, you need to start over.

That said, you can change the name of the entity any time, you can change the tax structure and you can create DBAs for existing LLCs without starting over.
whoa I didn't know there's no federal statues governing LLC's.
 

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LLCs are state regulated and defined (there is no federal statute governing the existence of LLCs). So, if you create an LLC in one state and want to move it to another state, you need to start over.

That said, you can change the name of the entity any time, you can change the tax structure and you can create DBAs for existing LLCs without starting over.
Actually some states allow you to redomicile an llc from another state allowing you to keep your existing llc history.

Sent from my VTR-L29 using Tapatalk
 

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I have a few clients who set up defined benefit plans for their businesses. One of my clients who is a doctor and a partner in a larger practice did this. We created a professional LLC where the firm would pay all of his earnings.

With this professional LLC we set up a defined benefit plan with him as the sole contributor. He earns high 6 figures and puts about 250k/year, tax deferred (like an IRA but with MUCH bigger contribution limits) into his DB plan.

From there, his DB plan "bought" an offshore entity (the DB plan is 100% shareholder of the entity). With several hundred thousand in the account, he is now buying foreign real estate.

Hi GlobalWealth,

Could you expand on this strategy? Doctor A was a partner meaning he had ownership of Practice LLC? Since the Practice has employees, his contributions were limited to traditional retirement plans and he likely paid taxes at the highest rates. Instead of this, he made a separate llc that had a defined benefit plan. How does that help him? What kind of incomes is receiving?

I assume he still receives a W-2 from his practice.
 

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