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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29487
Experience:  Taxes, Immigration, Labor Relations
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I am registered securities broker affiliated with an independent

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I am registered securities broker affiliated with an independent broker/dealer. As such, I operate as an independent contractor and received a 1099 for all commission and fee income. Under FINRA laws, the all commissions and fee income must be paid directly to a licensed individual, not a corporation.

I am told that some advisors are able to manage their tax liabilities by forming an LLC, or S-Corp and “assigning” income and expenses to the company and paying themselves from the company. I’d like help with the following:

1) Should I remain as a sole proprietor or form an LLC, or S-Corp? How will my choice impact my income and self-employment tax liability?

2) Can I assign income and expenses to the LLC/S-Corp? How? Specifically, what do I need to do to make the assignment?

Additionally, I live in Maine and rent office space in New Hampshire. The Broker/Dealer that pays me in Massachusetts. New Hampshire has a Business Profits Tax (8.5% on “income from conducting business activity within the state”) and Business Enterprise Tax (.75% for businesses with gross receipts of $150K). Maine does not. My clients are all around the country, with only a small portion on my income coming from New Hampshire domiciled clients.

1) What state should I form in? NH (office) or Maine (home)?
2) Can I segregate my income received from outside New Hampshire for the purposes of New Hampshire business taxes? For example, does my income received from clients living in Florida constitute business activity in New Hampshire?
3) Does income received from my broker dealer in Massachusetts constitute business activity in New Hampshire? (I’m assuming my office location means something.)

Here are some links to discussions about this issue:
http://forums.registeredrep.com/forums/rias-independents/assigning-income-subchaper-s-corp
http://www.investopedia.com/articles/tax/11/tax-tips-for-advisors.asp#axzz1oMGyvt7V

I’d like an experienced opinion with some actionable steps. Thank you.

Hi and welcome to Just Answer!

1) Should I remain as a sole proprietor or form an LLC, or S-Corp? How will my choice impact my income and self-employment tax liability?
That is something you need to decide it you want to have a separate legal entity.

Potentially you may have saving on employment (self-employment ) taxes if operate via S-corporation.

Having a single member LLC will not have any effect on your tax liability because it is a disregarded entity - and all income and expenses are reported as if you were a solo proprietor.

Also - in your situation because of FINRA requirements - you will not have legal protection when run operations through the LLC.
2) Can I assign income and expenses to the LLC/S-Corp? How? Specifically, what do I need to do to make the assignment?

You may not ""re-assign" your personal income to a different entity. However you may pay to a different entity for services and that would be your deductible expense - thus your personal income would be shifted to the entity.

Will or not you benefit from that - that is a different issues.

Bit having a separate legal (and in some situations taxing) entity - will require additional overhead - so you will only go this way is you clear see benefits.

 

1) What state should I form in? NH (office) or Maine (home)?

As a general rule - if you want to form a separate legal entity - you need to register it in the state where the entity will be operating. Thus if you operating your business activities out of your New Hampshire office - it should be registered in this state.

Even you register the entity in a different state - most states require additional registration for foreign (out of state) entities.
2) Can I segregate my income received from outside New Hampshire for the purposes of New Hampshire business taxes? For example, does my income received from clients living in Florida constitute business activity in New Hampshire?
That is based not on the location of your clients - but on your business location. If you operate your business activity in New Hampshire - the compensation you receive for that activity is considered as from New Hampshire sources and taxable under New Hampshire tax laws.

3) Does income received from my broker dealer in Massachusetts constitute business activity in New Hampshire? (I'm assuming my office location means something.)

Again - the location of payer is irrelevant - but the location of your business activity determines the source of income and jurisdiction (state and locality) which could tax that income.

 

Let me know if you need any help.

Customer: replied 5 years ago.
Thank you Lev. I will accept your answer.

In regards XXXXX XXXXX: "You may not ""re-assign" your personal income to a different entity. However you may pay to a different entity for services and that would be your deductible expense - thus your personal income would be shifted to the entity."

Is there an example that would illustrate how this might work? I assume you mean the individual pays the LLC or S-Corp. for services rendered by the entity to the individual. Can you elaborate?

Your understanding is correct - as long as that is your personal income - and it is reported to you on form 1099 (and to the IRS) - the IRS expects you to report that income.

You may however subcontract some work to a different entity - even if you own that entity - and report that cost as your expenses.

However in case of single member LLC that will not have any meaning because it is a disregarded entity - and all income and expenses are reported as if you were a solo proprietor anyway.

Lev and 2 other Tax Specialists are ready to help you

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