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Megan C
Megan C , Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 16539
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Hi I live in NJ. My daughter who is a minor (13y/o) wants

Resolved Question:

Hi I live in NJ. My daughter who is a minor (13y/o) wants to start a tshirt business and have a website. While doing some research I read that minors cannot have a business in their name. I also read about LLC's (w/partners and w/out) and also about S Corps. What entity would benefit us the most legally and tax wise if my daughter and I went in business together?? Would the proceeds get reported as income for me and would she also have to file income taxes?? Thank you in advance.
Submitted: 2 years ago.
Category: Finance
Expert:  Megan C replied 2 years ago.

Megan C :

Thank you for your question. My name is XXXXX XXXXX I will be happy to help you today

Megan C :

When you look at starting a business, people are looking to have liability protection and tax optimization

Megan C :

With a small business, an S Corp would be a good option for you. The reason being is that it will help you minimize any self employment taxes that you would have if you were a partnership or LLC

Megan C :

Your daughter would be a shareholder in the S Corp, and she would also need to file her own taxes, as she will have income

Megan C :

The same is true if you chose to be a partnership or LLC.

Megan C :

Your daughter is going to have income.

Megan C :

If you own part of the S Corp, part of the earnings would go to your tax return, and the other portion would go to her tax return

Customer:

Ok so if an S Corp is formed do we then form an LLC in order to have the limited liability protection and do we then make the LLC the beneficiary of the S Corp.

Megan C :

Well, an S Corp is a corporation. You would incorporate and then file form 2553 and elect to be treated as an S Corp

Megan C :

Either that, or you can open an LLC and file the same form and elect to be taxed like an S Corp

Megan C :

Either way, the S Corp gives you liability protection

Customer:

Ok thanks. XXXXX need to sit with an attorney and/or a cpa to find out which way (S Corp or an LLC taxed as an S Corp) would benefit us?

Megan C :

Honestly, both would protect you the same. But, I would go with the LLC because of the ease of formation and you don't have the same formalities as you do with a Corp. It's easier to maintain

Megan C :

With a corporation you MUST do certain things, like have annual meetings, etc or else you can "pierce the corporate veil"

Megan C :

It's harder to do that with an LLC ... it's much more flexible. Most small businesses are LLCs for that reason

Megan C :

But, a sit-down with an attorney is always a good thing if you have the ability to do that.

Customer:

Ahhhh yes I read something about the "pierce the corporate veil" issue online. Ok thank you for your advice.

Megan C :

You're welcome

Megan C :

How the S Corp reduces your tax is that you will pay yourself a salary based on your work with the business, and that's what FICA taxes are paid on

Megan C :

With a partnership or LLC taxed as a partnership you have to pay self employment taxes on your entire profit

Megan C :

As your daughter will be doing the work, she will get a salary from the business. You would get a small salary for any managerial duties that you do. But, the rest of the profit just has income tax

Megan C :

Do you have further questions about this?

Customer:

I see. So you do not have to pay taxes on the entire profit with an S Corp?? And self employment taxes is considered a higher tax bracket correct??

Megan C :

NO, you do pay income tax on all the profit. Self employment/FICA taxes are IN ADDITION TO income tax. So, you are essentially taxed twice = once as income, again as self employment

Megan C :

Those taxes go to fund Social Security

Megan C :

and Medicare

Megan C :

The income tax remains the same, no matter what option you choose. However, you will lower your self employment/FICA taxes if you are an S Corp

Customer:

Ok I have a better understanding now. I don't like the sounds of taxed twice though. I will take everything you have taught me into considertion when choosing. Thank you.

Megan C :

You're welcome. Once you have the information you need, please take a moment to rate my response positive so that I may receive credit for assisting you today

Megan C :

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