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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10110
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am a clinical psychologist. Last year, 2014, I created an

Customer Question

I am a clinical psychologist. Last year, 2014, I created an LLC in the State of Hawaii, with a plan to start my own private practice. It is a sole member LLC (company name in initials: "PH") by IRS, and got an article of organization for LLC by the State
of Hawaii (company name: "PH LLC"--- 'LLC' got automatically attached to the original name during the online registration). For the year 2014, I did not go further, and the company produced no revenue. My husband and I submitted extension for 2014 joint tax
return; no other actions are taken tax-wise. I use my married name NMS for personal and family finance purposes, and my SSN is attached to NMS. I use my maiden name NM for all my professional purposes, including my doctoral diploma, psychologist state licenses
and certificates, National Provider Identifier (NPI), existing provider enrollment with managed care companies, etc.. So, I used NM to get EIN with IRS, the article of organization and GET license with the State. I opened a business bank account for this LLC
(the bank took the name "PH LLC" by the State, EIN by IRS, and NM while being aware of NMS). This year 2015, I initiated the provider enrollment process with managed care companies, in order to submit claims as PH. They requested for W9. The instructions on
W9 say: Line 3, "If it is a single-member LLC that is a disregarded entity, ... check the first box in line 3 “Individual/sole proprietor or single-member LLC”; Part I, "If you are a single-member LLC that is disregarded as an entity separate from its owner
(see Limited Liability Company (LLC) on this page), enter the owner’s SSN (or EIN, if the owner has one). Do not enter the disregarded entity’s EIN. If the LLC is classified as a corporation or partnership, enter the entity’s EIN." I did not elect any form
of entity for the tax purpose within the first 2.5 months after incorporation, and thus I assumed it is currently a sole member LLC as a disregarded entity, and I filled it out accordingly, using NMS and my SSN. Here starts the problem. Some of the managed
care companies noticed the discrepancy (NM and NMS, EIN and SSN), and found it as a problem when generating a biz agreement/contract with PH. Some asked which I wanted on the contracts, and others just assumed and put down NMS-SSN and mailed the documents
for me to sign. I see problems with either option. Adding another thought to this situation, I recently went to a workshop where the presenter CPA was strongly advocating for switching to S-corp since those forms can provide more perks in taxation and liability
matters than LLC although more paperwork. I believe the presenter suggested the audience to attach Form 2253 (and/or 8832?) and a sorry-for-the-delay-to-declare letter on the tax return for the (entire) year the company wants to switch to and be taxed as S-corp.
My questions are: 1. The bank strongly recommended that I change the company name from "PH" to "PH LLC" by IRS, for the purpose of consistency with the company name filed to the State. The banker stated if I decide to switch to S-corp later, I need a whole
series of new document by Fed and State and a new type of bank account should be created. The banker asserted, thus LLC should be part of the name with IRS now. In contrast, I was told by someone else whether LLC is part of the name or not doesn't matter with
IRS, and thus I should not make any changes. What is the best way to handle this name problem at this point. 2. I learned I can keep the form of entity as LLC but elect to get taxed as s-corp instead of making a full conversion to s-corp. I am more inclined
to do this. What perks would I miss by doing this instead of complete S-corp? Also, which forms do I need to submit and when, 2553 and/or 8832? I read different options of 2553 right now, 2553 with tax return, and none necessary---which is true? 3. Last, assuming
keeping the form of LLC but get taxed as s-corp, what shall I do with TIN on W9? Again I am getting conflicting advice-- use SSN (that will be a problem as above-mentioned), use LLC's EIN despite IRS instructions, get a "personal" EIN with LLC name and use
it. Which one do you recommend?
Submitted: 1 year ago.
Category: Finance
Customer: replied 1 year ago.
As for my name (NM-professional name, NMS-married personal name) on agreements with manage care companies, W9, bank account, etc., can I keep NM? It's all got weird when W9 instructions of using my SSN came up...
Expert:  Lane replied 1 year ago.

Ok.

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First, you are correct, in following the IRS instructions for using Social Security Number with all tax reporting for a Single Member LLC.

From a TAX perspective, (yes, disregarded entity) you are a sole proprietor. The EIN that you may have (again, from a tax perspective only) is just for the purposes of paying any payroll taxes that you may have for EMPLOYEES.

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Some BANKS do ask for an EIN to open a business account, but IRS considers you a disregarded entity and wants you to use the Social Security number for W-9/1099/Schedule C purposes.

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Here's the IRS guidance on that:http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies

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Now, as to the liaility issues ... NO, that S-Corp information is completely off base. One of the reasons that the LLC is the fastest growing entity type out there, is that it DOES provided the liability proection of the corporation with the flexibility of the partnership ( or sole proprietorship, depending on number of owners).

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Corporate liability protection is a state law issue (all corporate/ busness entity/ association law is state law). This is WHY you form the entity at the state evel with the secretary of state. Further it's FOLLOWING that state law for LLC's or regular corporations (called the C-Corp) that will keep that liability protection intact. (Not co-mingling personal and LLC/Corporate assets, for example, is one way to be sure a creditor or lawsuit cannot "pierce the corporate veil," to attach PERSONAL assets or income for a corporat/LLC debt.

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The S-Corp is not an entity, but rather a tax election. And yes, the 2553 is the IRS form that you fil to have EITHER your state formed LLC or Corporation TAXED AS an S-Corp.... but that's NOT where the liability protection comes from ... again liability protection for a besiness entity is a state law issue.

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And becasue this election i something that can be filed at any time going forward, I would wait to see what your profitability looks like before doing so.

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Where a "self-employed" person simply pay him/hershel out of profits ... an S-COrp MUST set up a npayroll, pay themselves a reasonable W-2 wage AND file quarterly self employment taxes along with paying in payroll taxes (at east monthly). ... a LOT of administrative overhead (and.or cost if you let s CPA firm do all that for you).

... And what's the income tax benefit? (None) ... An S-corp (although it has to do it's own tax return - along WITH the payroll tax quarterly returns - the S-Corp tax return is an an 1120-S) - still passes all income (either as a salary OR if there is profit over and above this salary as a distributive share of profits on a K-1 - MORE overhead) to the owner and teh tax is actually paid on the 1040.

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Now, you notice I said INCOME tax ... there CAN be a saving on that extra profit ABOVE and beyond the salary that required ... and the OTHER expenses of the company, for an S-Corp in the form of Social Security and Medicare taxes. ... On the salary portion of nyour income ... there's no difference, you have to withhold FICA from your wage pay, pay it in monthly (sometimes bi-weekly, depending on the level of taxes) ... thats the employee half (7.65%) then the S-Corp (YOU) has to pay-in the other half, the employER half.

...

However, on that incremental profit ... that profit over and above the salary and other expenses (still talking S-Corp here) the distributions are taxed essentially as a dividend (NO social security and medicare tax) ... So, the S-Corp CAN save 15.3% on the EXTRA rofit over what would be a reasonabel salary or your educatin and skill level PLUS other expenes, what ever they are.

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BUT until you're that profitable, the additional overhead, administrative expenses, payroll tax headache and risk actually put you at a loss (as the single member LLC member, youd pay that SS & Medicare on schedule SE as self-employment tax.

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I tell my clients that UNTIL the tax SAVINGS on that INCREMENTAL profit become enough to offset the additional costs of setting up payroll AND the not so qualtifiable risk and headach of it all, the S-Corp tax election may mot make a lot of sense ... NOT TO mention that it adds, as I mentioned, NO more liabilty protection AND allow for MUCH more flexibilitu in how you do things ... You can write the LLC operating agreement to do essentiall ANYTHING that's legal ... where S-Corps are much more restrictive.

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Last subject ... C-Corp election... The C-Corp (historically called the regular corporation) is a COMPLETELY separate taxable entity (The Ford Motor Companies and Apples of the world are C-Corps). They provide NO MORE liability protection that LLC's. AND you must follow the corporate code of your state JUST as you muct follow the LLC code (typically a part OF the corporate) of your state, to keep that liability protection in place.

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And yes you CAN form an LLC (again, becasue it is essentially a corporate animal - really a hybrid of the partnership and the corporaton) and use IRS form 8832 to ELECT C-Corp taxation

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The issue with C-Corps is "double taxation." C-Corps, once they have calculated their profit for the year, have to file their own return (1120), but UNlike the S-Corp, the C-Corporation pays it's OWN taxes at corporate rates and brackets. ... then once that tax is paid the managers have to decide whether to declare a dividend OR book that profit to retained earnings (or some of both).

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... and guess what happens if a dividend is paid out of those AFTER-TAX profits. The owners are then taxed AGAIN (on those dividends). They receive a 1099-DIV), hence the double taxation you her about with C-Corps.

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I THINK I've addressed everything ... and I understand your desire to use your name as you desire ... but from a business standpoint, there are really two sets of rules that must be followed (1) Federal, and state, taxation and (2) business entity law (classically called corporate law) PURELY a state law issue.

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The two DO converge, and IRS will tax based at least partially on the underlying state entities, with some special tax elections available at the federal level. But this is tow separate bodies of law.

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let me know if you have questions ...

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Lane

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