Wednesday, January 3, 2007

LLC? Incorporate?

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June Walker said...

Hi June,

In thinking of our business for the next year. We realize that we have very little liability and relatively little overhead for our computer repair business.

We set up last year as a LLC, but were thinking that probably all we really need is to be a sole proprietorship. Will there be tax problems if we switch from LLC to sole proprietorship?

I know 2006 tax season, it'll be as a LLC, but for 2007 taxes it would be sole prop.

Also, if we go the sole prop. route, do you have any suggestions as to how to get business license? Would it be a dba or just in our own name?

Thanks for your help.


HI Emily,

An LLC is not a tax entitiy. That means it's not a corpoation or a partnership. It is what you make it. If you've made it nothing, then a one person LLC is a sole proprietorship.

By the way, in order to get the best tax advantages, a husband-wife business, should not be a partnership.More on that after tax time.

Business license procedures are usually determined by the county you live in. You do not tneed to have a business license to be a business. You can learn more about this in my book, Self-employed Tax Solutions.

Best, June

Anonymous said...

Wow, June. This is exactly what I needed. A simple, clear-headed breakout on incorporation. Thanks!

Dave said...

Thanks for the relevant topic; I'm curious about somewhat of a less common question. About 10 years ago, I got into a business with my b-in-law to do consulting work; that eventually failed, but we had created an s-corporation before that occurred.

We never dissolved the entity and I am now doing freelance consulting. He is fine with signing over his shares to me, but I'm not sure if it makes sense to take on the s-corp if there are no added benefits. It seems to me that your reasons for not creating the LLC/Corp are due to unnecessary costs; if the entity already exists, what are the reasons to go ahead with (or not to do so) using the previous entity? Do I need to use the same name as the s-corp or can I just refer to my freelance consulting "company" as a sub-entity?


June Walker said...

Dear Dave,

#1 reason: Accountant's cost for preparing federal and state corporate tax returns. Minimum approx $1,000.

#2. Recordkeeping for a corporation is more cumbersome.

Check your state's regs re transferring ownership of a corp.

-- June

Sarah said...

June, my husband is a student and I am a contractor. We have an S-corp formed but haven't used for anything. Our accountant is recommending that we pay ourselves a wage through the s-corp with taxes and whatnot taken out every pay period. What exactly is the benefit of doing this vs. just getting a 1099 from my client and gong the self-employed route? He says we'll save ourselves self-employment taxes but I am still not able to find a definitive answer on *how much* are we saving. The payroll service (online) itself will be about $40 a month.

June Walker said...

Dear Sarah,

Unless you are making oodles of money not just for your services but because of your reputation -- i. e. you can charge more that an equally competent indie -- then the only way you save taxes is by cheating. That is pretending the money you receive is not all for your services but also for your reputation, so to speak, and so you avoid SE tax on the income. I say more about this on my blog.

Change tax pros.

Dissolve the S-corp.

-- June

Alex said...

Hi June,

I have a sole proprietorship working in the insurance/annuity field. I want to protect my personal assets. Is the LLC route better for my situation than an INC?



Anonymous said...

Hi June,
I'm a LLC s-corp janitorial company.
Last year I lost all but two accounts so i went from 10 employees to 1 which is myself. Things have not gotten any better and the future is not looking good. Do I keep the LLC or do I go to being self employed?

June Walker said...

Dear Anon,

You need to read my posts on LLCs. An LLC may be a sole proprietorship, or a partnership, or a corporation.

Your question shows that you don't understand how your business is structured. That's not good!!!
Talk with your tax pro. ASAP.

-- June