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Should I file as a LLC, LLC taxed as an S-corp, or as just…

Should I file as a...
Should I file as a LLC, LLC taxed as an S-corp, or as just an S-corp.I recently sat down with a business lawyer to discuss my situation, and we came to the determination that a C-corp would not be beneficial for my tax situation due to the net profit I expect, versus what I would have to pay at the corporate tax level. I dabbled with the idea of a C-corp classification, to avoid net profits that I plan on keeping within my business, to be used for my child support calculation. I plan on maintaining my w2 employment job which I gross approximately 75k per year, and I do not plan on taking a salary, or any net profits for personal use, since I have my w2 position to keep me afloat.I can conservatively expect to net 30-40k my first year with the company. Also, my business would be in sales/marketing within the medical field, basically obtaining patient referrals for medical devices, and forwarding the business to a corporate office for them to carry out the order. I would be the sole operating owner, I do not plan on having any employees, but may pay independent contractors marketing/finder fees for new business acquired.Thanks
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Answered in 4 minutes by:
3/20/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,612
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. My name’s Lane …

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, to clients on three continents, since 1986.

I’m reading your question now.

Bear with me a moment while I type up my response.

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Customer reply replied 3 months ago
Okay great, I look froward to hearing from you soon.

First, just to kind of lay a foundation, there are only two underlying entity types at the state corporate law level.

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  • LLC, and
  • Corporation

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Then you can file the form 2553 (if it's an LLC) ... or an 8832 (if it's a regular corporation) to be TAXED as an S-Corp.

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S-Corp isn't actually an entity type. It's a tax election for one of those underlying state law entities.

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I agree without a doubt that the C-COrp won't help at that level ... With the new flat 21% tax rate for C-Corps, and he double taxation on dividends coming out of the Corporation, and the requirement to pay yourself a salary and have payroll, etc. There's more administrative overhead than is necessary here AND you're overall tax on this might still be lower as a passthrough.

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The S-Corp only saves on Social Security and Medicare. ANd at that income level you' wouldn't be able to get away with a salary level low enough (social security and medicare is still taxed on the salary portion of an S-Corp's profits) that there wouldn't b e any difference between that cost with the plain vanilla LLC and the salary on that S-corp (AT that income level) to make al of the additional administrative overhead f h S-Corp make sense.

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The LLC is the fastest growing entity type out there. One of the reasons is that it's still a passthrough, MUCH simpler to operate than an S-Corp with the required salary, payroll, quarterly 941 payroll tax returns, paying in SS& Medicare at least monthly, etc., etc. ... andd still provides the corporate liability protection of the corporation.

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Once you (if you) get to the place where there's say 100,000 of profit and THEN you only pay yourself, say 50,000 of salary through the S-Corp, THEN you can still file the 2553 and elect S-Corp taxation for the LLC.

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Right now, at tis income level, the S-Corp is just additional overhead and audit risk without any tax savings.

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(sorry for the typos. The site's not letting me edit for some reason)

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Questions?

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Bot***** *****ne, I hink star with simple LLC and then as income gets to the place where there can e some social security and medicare tax savings, file the 2553 to elect S_Corp taxation for the LLC

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Customer reply replied 3 months ago
Great Advice! The last question I have since you already have an idea of my financial situation, do you have any advice in regards ***** ***** up an IRA for myself? I currently do not have a 401k plan since my W2 employer has does not offer one. I'm 27, I currently do not have one, and I want to start saving for my future. Is this also something I can tie in with my new business for tax saving purposes or is it irrelevant.

Yes, you can do a what's called a solo 401(k), but that has to be used only for (to deduct against) the business income - AND, very important, must be established by Dec 31 of the tax year you're going to take the deduction for.

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If you're talking about 2017 income, becasue you don't have a workplace plan, you can deduct the full amount, 5500, into a traditional IRA.

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And for the business you can ALSO set up a SEP (Simplified Employee Pension) but that won't allow as large a deduction (20% of net self employment income)

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Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars on your screen, and then clicking “submit")

That’s the only way JustAnswer.com will credit me for the work.

...

But again, let me know if you need more here,

Lane

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Customer reply replied 3 months ago
I see, do you have a suggestion for my situation of what would be in the best interest for tax savings? As mentioned, I make about 75k with my w2 job where I claim one exemption and I'm not sure if I would be able to claim my daughter since I only have her 43% of the time, and I can conservatively project about 30k net this year for my business.Thanks again, I will rate 5 stars after this, and I weill definitely save you as a favorite. You have been more than helpful.

Yep, you have it right. She must be with you over 50% of time to be what IRS calls the custodial parent - this is different from what any state law divorce calls custody.

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For 2017 your only option is to do the deductible IRA (that will reduce your taxable income by $5,500)

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But for 2018 you should Definitely consider the solo 401(k). You get the full 18,000 salary deferral (just called that even though you won't actually have a salary as a non S-Corp LLC) PLUS 20% of the 30,000 net self-employment income (business profits.)

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So with the solo 401(k) you'd get to almost wipe out your taxable income,

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(18000 + (.93 x .2 x 30000) = a 23,580 deduction

...

Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,612
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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