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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22776
Experience:  Taxes, Immigration, Labor Relations
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My husband and I are starting a transportation business and

Customer Question

My husband and I are starting a transportation business and are not sure if we should file under sole proprietor, LLC, or an S-Corporation. The transportation business in general is slow due to the economy, however we want to prepare now for when we are "rolling in dough". Seriously, we are not sure how to file, we both have full time "regular" jobs and since its a startup company we would like to limited our expenses. Our biggest consern is removing liability away from our personal assets and keep all of the responsibility on the company. Any suggestions?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

In most situations there would not be much difference in overall tax liabilities.

solo proprietorship will not provide you any separation from personal liabilities.

 

LLC is generally treated as partnership if there are more than two members - and will require to file partnership tax return, however for income tax liability - it is pass through entity - all taxable income will be reported on partner's individual tax returns.

It does limit personal liabilities, but in most situation - if you apply for a loan or sign a lease - the other party will ask for a personal guarantee...

Also - LLC in California is subject of $800 minimum franchise tax - see details here - http://www.sos.ca.gov/business/llc/llc_faq.htm

 

C-corporation - is completely separate entity - it files its own tax return and pays corporate taxes. You may receive wages for your work for C-corporation and that will be your taxable income, while for C-corporation that would be a deductible expenses. If -corporation pays you dividends - they will be taxed twice - on corporate level and on individual level - so C-corporate may be beneficial if you want to keep the money in business.

 

S-corporation is somehow in the middle between LLC and C-corporate. It is a separate entity that pays you wages if you work for S-corporation. But S-corporation doesn't pay income tax - income tax liability is passed through to shareholders who in turn report both wages and dividends on individual tax returns. Generally - if your net business income is more than $40,000 - it might be more beneficial to have S-corporate instead of LLC - you will pay yourself reasonable wages and the rest of income will be distributed as dividends - that will provide you saving with self-employment taxes.

 

Both S-corporation and C-corporation are subject of California franchise tax - see details - http://www.sos.ca.gov/business/

 

Let me know if you need any help.

 

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22776
Experience: Taxes, Immigration, Labor Relations
Lev and other Tax Specialists are ready to help you
Customer: replied 5 years ago.

I think the S-Corporation sounds like it would work better for our situation. The matter of fact is that we will most likely not make a profit for sometime, and our hope is to at least break even and have the company pay for its expenses without us having to use personal money for that.

 

I notice you handle Labor Relations- not sure if this qualifies, but if we hire a "contract" driver to drive for us occasionally, would we have to get worker's comp insurance? Most of the time my husband drives the limos, but once in a while we hire out contract drivers, they technically are not "employees", so we weren't sure what the guidelines are in this situation.

Expert:  Lev replied 5 years ago.

If you do not have any profit - for tax purposes there will not be any advantages of having S-corporation. You may be solo proprietorship or choose LLC treated as a partnership if you concern about legal liabilities.

S-corporation would require additional overhead - so you will have tax benefits only if you make a substantial profit.

 

If you are an employee - your employer should withheld FICA taxes from your wages 6.2% social security and 1.45% Medicare tax. At the same time your employer is required to pay employer's portion of FICA - 6.2% social security and 1.45% Medicare tax and FUTA and SUTA taxes (unemployment).

If you are self-employed - that would be your responsibility to pay self-employment taxes 12.4% social security and 2.9% Medicare tax. However SE taxes are applied on net income after deducting all eligible expenses.

So it is very important to identify your status. The IRS publication 15 - http://www.irs.gov/pub/irs-pdf/p15.pdf is the main document that addresses employee status - page 7. A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. This distinction is important because an employee and self-employed are taxed differently.

The IRS has developed a list of factors which are used on a case by case basis to determine whether a worker is an independent contractor or an employee for IRS tax purposes. The twenty common law factors of a perfect independent contractor relationship that are published here - http://www.wwwebtax.com/general/independent_contractor.htm

These factors should be used in determination. The laws - the employee vs. independent contractor issues - are extremely complex and you should obtain the help of a local tax attorney. It is also possible to use a federal "safe harbor" rule which can exempt certain workers from the common law factors listed above. To be exempt from these factors, you should establish that you:

  • have consistently treated the worker and similar workers as independent contractors;
  • have filed all the required forms; and
  • have had some reasonable basis for treating the worker as an independent contractor because there were similar rulings or court cases, or because it was an industry-wide practice or because prior tax auditors had never questioned the practices.

Please let me know if you need any help this matter.

 

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