I want to run this detailed scenario by a Tax professional…

Question

I want to run this detailed scenario by a Tax professional for any advice,
gotchas, or implications I will need to be aware of as not to be surprised in
terms of liability or issues with taxation.

1) I reside in NC, and will be forming a LLC in either Wyoming or Delaware. I
will be filing a sub-chapter S. I am assuming doing so, there will be a
considerable taxation benefit.
2) My business will be conducted largely online. I will source consultants on
engagements through partner companies. The partner company bares the burden of
having certificates to operate in each state, will being managing payroll,
paying the consultants their 1099, W-2, and C2C directly from their payroll, and
will have a special arrangement to provide my company the remainder margin from
the overall rate charged to clients. I will also be paid in a separate C2C
exchange for my own personal commitment, a weekly flat sum amount based on the
percentage of availability I can provide each week for 1 year.
3) I will have 3 x employees. The first 2 x employees are direct
employees/actual firm employees. On payroll, I will pay myself, and my wife. I
will also pay a partner in Netherlands on a C2C basis, for his aide in sourcing
resources on engagements in EMEA.

4) My expenses will be:
-home office tv/internet/phone bundle of which I am provided a special level of
internet service and phone service , available with the TV portion.
-prepaid legal service ( advice, contract review, contract execution, debt
collection, etc)
-retained corp attorney service ( with a local attorney in my city/state)
-trademarks
-web domain, mail exchange, web site, logo/web page graphics design
-voice over IP services
-web/video conferencing services
-CPA tax review / preparation
-quicken book / resources
-docusign document services
- recruiting/staffing services
- origination fees/other fees

Do these present any issues I should be aware of in which I could be in for a
surprise? Does this seem pretty straight forward, and basic? This will be my
first time starting a firm, and going off on my own hence my precaution in
asking first. Are there any misconceptions about tax advantages in establishing
my LLC / as S-Corp in Wyoming or Delaware while I reside in NC State? Are there
any misconceptions that I won't be considered operating a foreign LLC / company
in my State , - at onset, I won't have any clients or direct business in NC
State, instead I will only personally reside in NC and happen to have a small
home office in the location. My work will largely deal with partners paying me
on a C2C basis, and each of these firms are quite geographically scattered
throughout the US. Will paying a foreign company, on a C2C basis cause any
issues. The foreign company is ran by a long term friend, technical acquaintance
of mine, if I could I would employ him directly however he is a citizen of
Holland physically in Eindhoven, NL.

The partner companies plan to bill clients for any resource hour worked, and
then pay me the difference/margin. I will then subtract any overhead ( costs ,
etc) , and set aside the remainder for payroll , and/or capital in the company.
I will eventually begin directly staffing end clients and be able to hire on
additional staff.

Any tax implications given this length of detail?

Thans

olwagner · Accepted Answer

olwagner :

1) S Corp is very advantageous when compared to C Corp. The difference between
an S Corp and an LLC is not that big.
- The advantage of the S Corp is that you will be drawing a salary, hence you
only will be paying FICA payroll taxes on your salary. A single-member LLC is a
disregarded entity, meaning that all of the profits will be subject to
self-employment tax (the equivalent of FICA payroll taxes, same percentage, SE
tax is reported on the 1040).
- The advantage of the LLC is that you have fewer formalities. The only return
you will have to complete with the IRS is a schedule C with your 1040, which is
an income statement (you would have to produce a balance sheet to the Secretary
of State of the place you incorporated however). With an S Corp, tax compliance
is more expensive: Your S Corp would file its own tax return (on form 1120S,
which is the whole shebang: Income Statement, Balance Sheet, Reconciliation
book-to-tax, Retained earnings changes), then issue you a K-1 which you would
then report on your 1040 using schedule E.
My guess is that the SE tax benefit would outweight compliance cost (making the
S corp more advantageous) once your annual profit exceeds $100,000.
2) ok
3) If you have employees, (althought not a directly related issue), you probably
you already have the complexity that comes with an S Corp, so you might as well
use an S Corp structure. If your wife is an employee, you'll need to remmit FICA
taxes and income tax withholdings (local + federal) most likely quarterly (if
you expect your employment tax liability to be $1,000 or more in a full calendar
year, you would have to file form 941 quarterly, if less than $1,000 form 944
annually) + local reporting. You would likely need a payroll provider (ADP or
Intuit Payroll).
From
http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Husband-and-Wife-Business
: "However, if the second spouse has an equal say in the affairs of the
business, provides substantially equal services to the business, and contributes
capital to the business", then you have a partnership (or can elect S Corp), a
disregarded single member LLC would not be possible (as far as the IRS is
concerned). A partnership return would be similar to an S corp return.
Reading the page mentionned, I also conclude that a spouse can NOT be an
independent contractor. Unfortunate, since it would have simplified things.

When it comes to the Dutch "partner", I invite you to do a search on the
difference between employees and independent contractors. If he/she is an
employee, you would have to pay payroll taxes to the Dutch authorities (wouldn't
that be fun). If he/she is an independent contractor, you wouldn't have anything
to do if the services are provided from the Netherlands (if from the US, then
file an 1042-S with a 30% withholding, that they'll likely get back by filing a
1040NR claimimg treaty benefits).

4) Since you are in NC (and you are operating the company, as opposed to having
people in Wyoming operate the company for you), yes, you would have nexus in NC
and therefore you would have to register your company as a foreign comapny with
the NC secretary of state. My uderstanding is that Delaware is really good for
really big corporation due to abundance of legal precendent which can cause a
lot of certainly for their legal departments. I don't think Delaware is for you.
Wyoming is really cheap to maintaing a company there (in most cases, you have a
franchise tax of $50/year. Add another $100/year for the registered agent). I'll
let you compute the cost of Wyoming + NC (as a foreign company) vs incorporating
directly in NC.

NO, you do not want to "employ" your Dutch friend. He can not be a US employee
unless and until he is physically in the US to work - and I don't think you want
to take care of Dutch payroll taxes. Paying a foreign company does not cause
issues (unless we spoke about paying interest, dividends or royalties (for some
compyright/patent they previously sold you) in which case a 1042-S would be
warranted). You want to pay him as an independent contractor (and it will then
be up to him to comply with Dutch withholding/tax laws)

I want to run this detailed scenario by a Tax professional…

How JustAnswer works

JustAnswer in the News:

What Customers are Saying:

Meet the Experts: