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winktax
winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience:  18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
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I have a sole proprietorship company. I want to turn it into

Resolved Question:

I have a sole proprietorship company. I want to turn it into an LLC (Texas). My spouse is an employee now (gets W-2) and I want to begin receiving an official paycheck myself. Would it be best -- in filing my paperwork -- to show it as a "corporation" and make it an S-Corp so both of us can get a paycheck yet have legal protection that LLC's offer?
Submitted: 1 year ago.
Category: Tax
Expert:  winktax replied 1 year ago.

winktax :

An LLC - Limited Liability Company is a legal status granted by the State. The tax status of the LLC granted from the IRS. An LLC can be taxed one of many different ways. 1) Disregarded Entity - which is a sole proprietorship, this would be your current status but with the LLC added. 2) Partnership 3) S-corporation 4) C-Corporation. 5) others which would no apply to your situation.

winktax :

Wages, paychecks can be paid to the owner under and S-Corporation or C-Corporation. For small business's an S-Corp is the most common choice.

winktax :

An S-Corp is a pass thru tax entity. (so is a partnership). This means there is no income tax at the corp level, All profit (and loss) passes thru to the owners (shareholders) and is reported on their individual returns.

Customer:

that is very helpful to know. So an S-corporation would be treated like a sole proprietorship. Would we be using a "Schedule C" for our tax return on an S-Corp?

winktax :

This status creates a two path method for profits to leave the Corp. 1) a distribution (similar to a dividend) - ordinary income tax due 2) A wage, ordinary income tax due and Social security tax due.

winktax :

The IRS has a rule, an S-corp must pay a reasonable wage if there is profit. This rule is to prevent the owners from avoiding all Social Security taxes. The advantage is that you get to determine what a reasonable wage is, this is a pretty lose choice.

Customer:

Frankly, we were considering both of us just making min. wage on a 30-hour work week. Would that be acceptable as a "reasonable wage" ?

winktax :

An S-corp, either a straight incorporated or LLC taxed as an S-Corp are required to file a separate income tax return. Form 1120S.

Customer:

as we are nearing getting Soc. Sec benefits (both of us are 60). That way we could make some supplemental income in addition to our Social Sec. checks

Customer:

?

winktax :

You can determine a reasonable wage using any method. the rule is very lose. XXXXX XXXXX, former presidential candidate made 300 million one year, and took a wage of $900,000 and that was deemed reasonable.

winktax :

Yes, the S-corp would allow you to choose who gets the paycheck, who pays social security (one the paycheck part is subject to social security taxes). And only the wage is considered earned income for purposes on earning limits if you decide to take social security early (before normal retirement age, 67). There is a earning limit if you take SS early, currently around $15,000, if one is under normal retirement age, and is getting SS and earns more than the limit they have to pay back SS a part of their SS)

Customer:

OK. But we both wanted to get a paycheck. So could we both get a paycheck and still pay-in to Soc Sec before we take SS early?

winktax :

yes both of you could take a paycheck and pay into Soc Sec. To earn Soc Sec credit one needs to earn at least $4,000 each year to get the full 4 credit allocation.

winktax :

40 credits is needed to qualify for full social security benefits.

winktax :

Soc Sec is a two part calc. do you have enough credits then what were the actual earnings.

Customer:

So LLC is its own entity, files its own return, but pays both of us a paycheck (issues both of us a W-2). If LLC is profitable, does it pay IRS taxes directly?

winktax :

NO, an S-corp is a pass thru entity, no income tax at the Corp level, all profit/loss passes thru to the owners and is reported on their personal individual return.

winktax :

That is the big difference between an S-corp and a C-Corp. C-corp pays tax, S-corp does not.

Customer:

Oh that's right. So we take paychecks (and taxes taken out) but -- if LLC is profitable, I -- as individual owner -- pay taxes on the proft also?

Customer:

Wonder if we should set it up as a Partnership instead (2 owners) and take K-1s? Can we still get paychecks that way?

winktax :

yes, and accounting wise the Wage (paycheck) reduces the profit. So you only pay taxes on the combined profit/income of the S-corp (wage + net income)

winktax :

An S-corp return issues Form K-1's to the owners, just like a partnership. A partnership generally does not issue paychecks to partner's, all income (profit) of the partnership is normally subject to social security tax for the owners. Just like a Sch C, you pay Social security tax on your entire net income, A partnership just allows for more than one owner.

Customer:

Thank you, XXXXX XXXXX really helping me understand some things. But an S-Corp can have more than one owner, not just the single owner like a sole proprietorship?

winktax :

Yes, an S-corp is limited to having less than 100 shareholders, a husband and wife count as one but are still considered separate owners for K-1 purposes.

Customer:

So: I think we will probably file for an LLC w/state of Texas. Show it as a "corporate" entity on paperwork with two member owners: me and spouse. Do I need to register as an S-Corp. with IRS? Right now we do have a Fed EIN number -- will that number need to be changed since it will be an LLC instead of sole proprietorship?

Customer:

Both of us will take paychecks, then get issued K-1 from S-Corp, and S-Corp will file a return that will pass-thru profit/loss to us as co-owners.

Customer:

Does that seem right?

winktax :

1) You file for LLC from Texas 2) then apply for a new tax id from the IRS 3) then file Form 2553 - Election by a Small Business Corp (http://www.irs.gov/pub/irs-pdf/f2553.pdf) 4)then your register the LLC to be an employer with Texas 5) then you can take a paycheck.

winktax :

Come January of next year the S-Corp issues W-2's and then March 15th the S-corp files Form 1120S, then April 15th you file your personal tax return.

Customer:

Very helpful. Anything else you think I need to know? I do have one other scenario that I might like to run past you....will pay a bonus amount to you to go over it if you have the time

winktax :

ok

Customer:

We have a family trust (just formed it for estate planning purposes). Wondering -- for privacy reasons -- if we had it own the LLC (in Texas, trusts can own LLCs). So spouse and I could still take paychecks, but trust would be the sole owning member. How do you see this playing out as far as filings? Right now trust account is strictly cash from sale of prior properties and in an interest-bearing savings account until we can decide what other kind of investments to make.

Customer:

One thing to consider: God forbid the LLC would ever have to file bankruptcy. But -- if it did -- I would not want creditors to come after family trust.

winktax :

Yes the trust could be a shareholder, however trusts cannot take a wage (someone, an officer, an owner needs to take a wage). better choice would be to have your and your wife own the S-corp, and complete the paperwork to assign your shares in the corp over the trust on death, either through a will or transfer of membership interest (which only is filed when death is apparent)(many times people do this with their house, they sign the quick claim deed but do not file it until after death.)

winktax :

In general, liability will be contained at the corp or LLC level. only in cases of outright malpractice or in cases where the shareholders treat the corp/LLC as if it's their personal bank account (not run it as a business) would liability extend to the shareholders.

Customer:

O.K. thank you. I really appreciate the advice. going to cut and paste this transcript to save and review later.

Customer:

Now let me figure out how to finish here and pay you.

winktax :

one other item. the Form 2553 needs to be filed within 75 days of starting the LLC.

Customer:

ok. so noted.

Customer:

anything else, otherwise will sign-off

Customer:

hey winktax: I am trying to figure out how this system pays you and how I can add a bonus? All I have been able to do is rate your service ("excellent" by the way) Can you advise what else I need to do to add bonus?

winktax :

I do not know how that process works, I believe it shows up as part of the acceptance process.

Customer:

O.K. I'll see what I can do.

winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience: 18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
winktax and other Tax Specialists are ready to help you
Expert:  winktax replied 1 year ago.
ok, good luck

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