OP
OP
SSN Vet
Member
I'm not sure how it goes in each state....but from where I am, the LLC gives you the best of both worlds.
Here's the process.....
1. Fill out the application to form an LLC with your states board of corporate elections and commisions. You are creating a legal entity by doing this, so you have to declare who the "registered agents" of the LLC are. These are the people who get sued if the LLC causes someone harm, or who get prosecuted if the LLC conducts illegal activities. In my case, even though it's my wifes business (so far) I have both of our names listed as registered agents, because if one of us is incapacitated, the other one can still cary out the legal activities of the LLC (i.e. sign a tax return). The state is going to make sure you're LLC name doesn't duplicate or very closely match that of another LLC in the state, cash your check and send back your application with a stamp and signiture on it. My Dad tells me that people used to think that LLCs were a good vehicle to borrow money from the bank, because they could let the business go under and walk away from the debt, but that banks are wise to that and will require you to put up your personal assets as collateral.
2. Download form SS4 from the IRS web site, read it and either call up the 800 # or apply on line. Now your LLC has the equivalent of a SSN or tax purposes.
3. Download and submit form 8832 to the IRS. This is where you request that your LLC entity be classified as a Corporation for tax purposes. You don't have to be a corporation in order to be taxed as one. In about 6 weeks you'll receive a response from the IRS saying they have approved your form 8832 entity classification.
4. Next you download and submit form 2553. This is where you elect to be classified as an S corp. When you read through the instructions, it's going to sound like you can't be an S corp. unless you have employees, etc.... My tax guy tells me that this is their attempt to scare off sole props. from dodging FICA taxes by establishing LLCs and taking all of their profits as pass through income, vs. wages. Just submit the form and realize that at some undefined income thresh-hold, your going to have to run payroll and pay yourself a salary, upon which you will pay FICA. For example, a plumber friend of mine makes about $50K/year in profit. He pays himself $20K/year salary for the work he does for the LLC. Then at the end of the year he takes the remaining $30K as pass through income. He only pays the 15% FICA on the $20K. Again, you'll get a response from the IRS saying they accepted your status as an S corp.
5. I'd suggest getting a business checking account, if you can get one without monthly charges. Often you need to carry a min. ballance to avoid such charges.
6. You need to use the business $ for business purposes and not co-mingle your private and business funds. You can lend money to the business, but don't use business dollars to pay for your personal expenses. If your business assets are less than $100,000, you don't have to submit ballance sheets and other such business reports with your taxes. You don't really need to run Quick Books or Peach Tree, but keeping a little spread sheet or writing everything down in a ledger is a really good idea.
7. Your going to get a lot of paperwork from the IRS. If your not cutting payroll on yourself or others, you can throw all the Form 941 stuff away (this is where you send in the FICA).
8. If your turning a profit, you need to submit quarterly estimated taxes. As a pretty decent rule of thumb you can take your estimated profit, multiply it by 25% and then split that between the Feds and the State. Or, if you have a "day job" you an just up your withholding at work. The IRS doesn't care how they get your money, as long as they get your money.
9. At the end of the year, you file form 1120 to report how much profit the LLC (taxed as an S corp) made. Here you also pay any specific "business taxes" that are due (still haven't figured out what these are). Then you cut a schedule K1 to all share holders in the LLC/S corp. reporting to the IRS what each of their share of the profits is.
10. Each share holder lists their share of the profits as reported on schedule K1 on their 1040, Schedule E. Done!
11. Pray you don't get audited.
12. Every year the LLC has to file an Annual Report with the state (cost us $80) in which you state that you're still in business, your address is still good and the registered agents are still the same.
It's easier than it sounds and as long as you don't have to formally split up the shares among multiple share holders, imho, you don't really need a lawyer at all.
And finally....I'm not a lawyer or an accountant, so if you believe anything I've written above, your on your own
edited to add a word about "hobbey losses"
if your business doesn't turn a profit and pay some taxes within a couple years, the IRS is going to call your bluff and say it's not a business but rather a hobby and that your just trying to deduct your hobby expenses from your taxable income. One of the ways to avoid this is to show that your are doing business in a "business like manner" .(... segregated accounts, EIN, Records, legal entity, bla, bla, bla).
Here's the process.....
1. Fill out the application to form an LLC with your states board of corporate elections and commisions. You are creating a legal entity by doing this, so you have to declare who the "registered agents" of the LLC are. These are the people who get sued if the LLC causes someone harm, or who get prosecuted if the LLC conducts illegal activities. In my case, even though it's my wifes business (so far) I have both of our names listed as registered agents, because if one of us is incapacitated, the other one can still cary out the legal activities of the LLC (i.e. sign a tax return). The state is going to make sure you're LLC name doesn't duplicate or very closely match that of another LLC in the state, cash your check and send back your application with a stamp and signiture on it. My Dad tells me that people used to think that LLCs were a good vehicle to borrow money from the bank, because they could let the business go under and walk away from the debt, but that banks are wise to that and will require you to put up your personal assets as collateral.
2. Download form SS4 from the IRS web site, read it and either call up the 800 # or apply on line. Now your LLC has the equivalent of a SSN or tax purposes.
3. Download and submit form 8832 to the IRS. This is where you request that your LLC entity be classified as a Corporation for tax purposes. You don't have to be a corporation in order to be taxed as one. In about 6 weeks you'll receive a response from the IRS saying they have approved your form 8832 entity classification.
4. Next you download and submit form 2553. This is where you elect to be classified as an S corp. When you read through the instructions, it's going to sound like you can't be an S corp. unless you have employees, etc.... My tax guy tells me that this is their attempt to scare off sole props. from dodging FICA taxes by establishing LLCs and taking all of their profits as pass through income, vs. wages. Just submit the form and realize that at some undefined income thresh-hold, your going to have to run payroll and pay yourself a salary, upon which you will pay FICA. For example, a plumber friend of mine makes about $50K/year in profit. He pays himself $20K/year salary for the work he does for the LLC. Then at the end of the year he takes the remaining $30K as pass through income. He only pays the 15% FICA on the $20K. Again, you'll get a response from the IRS saying they accepted your status as an S corp.
5. I'd suggest getting a business checking account, if you can get one without monthly charges. Often you need to carry a min. ballance to avoid such charges.
6. You need to use the business $ for business purposes and not co-mingle your private and business funds. You can lend money to the business, but don't use business dollars to pay for your personal expenses. If your business assets are less than $100,000, you don't have to submit ballance sheets and other such business reports with your taxes. You don't really need to run Quick Books or Peach Tree, but keeping a little spread sheet or writing everything down in a ledger is a really good idea.
7. Your going to get a lot of paperwork from the IRS. If your not cutting payroll on yourself or others, you can throw all the Form 941 stuff away (this is where you send in the FICA).
8. If your turning a profit, you need to submit quarterly estimated taxes. As a pretty decent rule of thumb you can take your estimated profit, multiply it by 25% and then split that between the Feds and the State. Or, if you have a "day job" you an just up your withholding at work. The IRS doesn't care how they get your money, as long as they get your money.
9. At the end of the year, you file form 1120 to report how much profit the LLC (taxed as an S corp) made. Here you also pay any specific "business taxes" that are due (still haven't figured out what these are). Then you cut a schedule K1 to all share holders in the LLC/S corp. reporting to the IRS what each of their share of the profits is.
10. Each share holder lists their share of the profits as reported on schedule K1 on their 1040, Schedule E. Done!
11. Pray you don't get audited.
12. Every year the LLC has to file an Annual Report with the state (cost us $80) in which you state that you're still in business, your address is still good and the registered agents are still the same.
It's easier than it sounds and as long as you don't have to formally split up the shares among multiple share holders, imho, you don't really need a lawyer at all.
And finally....I'm not a lawyer or an accountant, so if you believe anything I've written above, your on your own
edited to add a word about "hobbey losses"
if your business doesn't turn a profit and pay some taxes within a couple years, the IRS is going to call your bluff and say it's not a business but rather a hobby and that your just trying to deduct your hobby expenses from your taxable income. One of the ways to avoid this is to show that your are doing business in a "business like manner" .(... segregated accounts, EIN, Records, legal entity, bla, bla, bla).
