This is well intentioned, but incorrect. For startups and small businesses, as long as you do not have outside professional investors (like VC's) always use LLC's. The solution to the problem described by Chris is simple: do your accounting on a cash and not an accrual basis. That way the only way you will ever pay taxes is if you have the cash. LLC's are designed to: 1) avoid double taxation (at the personal and corporate levels) and 2) allow you to pass losses through so that you can reduce your personal tax liability. As was noted there are many very large brands that use LLC's for certain products too such as Amazon, NFL, A&E Television and probably thousands more. Finally, speak to an accountant so that they can walk you through the details.
LLC vs. S-Corp vs. C-Corp
41–50 of 88 posts
Re: LLC vs. S-Corp vs. C-Corp
#42I am sure the author of this article intended to help others make wise tax/entity formation decisions but many of the facts mentioned are just incorrect (tax rates and some general tax concepts). C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp. The tone o…
Can you clarify this: "But then if you end up not spending that money because you made a boatload of cash the next year and want to take it out:" Why would you have to pay taxes again? Sure, you can pay taxes on the growth, but you wouldve paid taxes on the growth even if you had taken it out. Clearly I'm missing something, so please clarify :-)
Because in a C-Corp, the earnings don't pass through to you personally. They belong to the corporation. So you pay tax on them at the corporate tax rate. Then when you personally want the money, you have to pay it to yourself as income. It gets taxed AGAIN. That's basically the only way for you to get the money. The idea is that with a C-Corp, if you want cash you earn in the corp to ever become your personal money, you have to take it out the year you earn it, otherwise those dollars will be taxed twice.
Re: LLC vs. S-Corp vs. C-Corp
#43OT rant. The goddamn social sharing toolbar on the left covers up a paragraph's worth of first 2-3 characters on mobile Safari.
Re: LLC vs. S-Corp vs. C-Corp
#44Earlier quoted context omitted.
Please expand on this. It's quite a bold statement to make without giving at least basic details about what non-trivial issues you are referring to.
With liability protection you want two forms of protection. The Founder(s) needs to be personally protected from the company liabilities, and you want to company to remain protected from the liabilities of the Founder(s). For example if you form a "single member" LLC, or a LLC with 1 owner, because LLCs are partnerships Court's will not protect the LLC from the single Owner's liabilities because there are no partners…
'because LLCs are partnerships' huh?
Single Owner LLCs exist specifically to protect the personal assets of a owner from the creditors of the LLC, IFF the LLC was the signatory on the debt, rather than the owner (if you have to provide an SSN to secure the debt, it's probably in your name personally, rather than in the companies name).
Courts will protect the owner, as long as the owner keeps their personal finances and the company finances (and activities) entirely separate - pay a salary to another account, etc. If there's any mixing, you get screwed. C-Corp/S-Corp doesn't change any of that at all from a single-owner perspective though...
Re: LLC vs. S-Corp vs. C-Corp
#45Earlier quoted context omitted.
YES! It's so annoying how few people understand this. People are never "in a tax bracket" -- only money is! Your first $40k may be taxed at 10% and your next $20k may be taxed at 15% or whatever, but you are not "in a tax bracket". The idea of being "in" a tax bracket gave rise to the dumb idea that making more money can net you less after taxes, which is virtually never the case.
Sorry, but it may be dumb, but it's true. Making more money can lead to less take-home pay. One really good example is if you hit the AMT (alternative minimum tax.) "Your money" is not in the AMT-- you are. And it often means that a raise can end up costing you money. There are also similar situations where getting a job can mean losing out on welfare, leading to you actually having less money to take home.
Yes, the AMT is the one case where you could end up with less take-home. Its an exception to the normal functioning of the tax code, though, and it works by prohibiting most permissible deductions. Thus, while the statement about the AMT decreasing take-home with increased is factually correct, this does not happen through the bracket system. GP was clearly addressing the misconception that people move into tax brackets and must pay higher tax rates in all their income as a result.
Your welfare example has nothing to do with taxes. Welfare benefits are set by gross income level with some COL and other local adjustments. Your tax status is irrelevant.
Re: LLC vs. S-Corp vs. C-Corp
#46OP does not touch on tax shelters such as the Individual 401k. I am a W2 employee and max out my social security tax through the W2 (by far). I then have an LLC that I do side consulting with. My wife doesn't have a job so she does the billing for my LLC. I max out the employee portion of my W2 401k (17,500 this year) so can only contribute employer portion to my Individual 401k (20% of profits). With my wife, since she doesn't have a 401k at a W2 employer I can shelter 17,500 employee portion for her and then the employer portion on top of that. Essentially the max you can put in for an individual 401k is 49,000 per year if I remember correctly.
You can open an individual 401k at either Vanguard or Fidelity - it's very easy. In many states, the individual 401k receives similar creditor protection to regular 401ks.
Consult an attorney and tax advisor before taking action on what I have written. This is neither tax or legal advice and I am in fact an idiot who knows nothing about anything.
Re: LLC vs. S-Corp vs. C-Corp
#47I am sure the author of this article intended to help others make wise tax/entity formation decisions but many of the facts mentioned are just incorrect (tax rates and some general tax concepts). C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp. The tone o…
>C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp. I think you are correct few start-ups and small businesses will ever incorporate and be taxed as a C-Corp. However, there are limitations to the S-Corps, such as a max of 100 shareholders and I think prohi…
My understanding is that a C-Corp also has much simpler paperwork around tax time.
Re: LLC vs. S-Corp vs. C-Corp
#48It's a little more complicated than that: > An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. File Form 8832, Entity Classification Election, to elect classification as a C corporation. File Form 2553, Election by a Small Business Corporation, to elect classi…
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Re: LLC vs. S-Corp vs. C-Corp
#49Earlier quoted context omitted.
An LLC may be easy to set up, but maintaining the personal liability shield is non-trivial. I'd recommend getting advice from a lawyer no matter the route taken.
Please expand on this. It's quite a bold statement to make without giving at least basic details about what non-trivial issues you are referring to.
IANAL, but some basic details:
There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa.
You also need to follow the formalities of a corporation by keeping formal records (minutes, shareholder acts, etc.).
If you fail to do either of these things you, in addition to the LLC, can be sued, and you can lose personal assets. It's called 'piercing the corporate veil'. A great run-down is here:
http://www.nolo.com/legal-encyclopedia/personal-liability-pi...
Re: LLC vs. S-Corp vs. C-Corp
#50With all due respect, this article really isn't that great. Here's the real difference, stated succinctly: LLCs and S-corps are pass-through entities that aren't generally subject to regular corporate income tax like C-corps are. (But there are exceptions, like NYC, which taxes S-corps as if they were C-corps.) Additionally, C- and S-corps can issue stock to owners and investors, while LLCs cannot, but S-corps are re…
I started as an LLC and had to covert to a C-Corp. Paid a lawyer to do it, but it really wasn't hard at all. Of course we also didn't have many assets at that point.