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Am becoming a scuba diving instructor in VA, converting a hobby

into something that may generate...
Am becoming a scuba diving instructor in VA, converting a hobby into something that may generate both income and liabilities. May have a silent party/partner/member (if LLC) participate in ownership. Can you advise on:
1. An organizational entity (LLC v Corp)?
2. State to regster entity (VA, Delaware, etc) for tax &/or legal advantage?
3. Can I make deductions for equipment & training expenses already purchased that will be my contribution to the business?
4. What implications should I consider associating with my foriegn investor (Belize shop owner to whom I will refer business) if he contributes funds?
Thanks for your time.
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Answered in 35 minutes by:
5/1/2011
socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39,383
Experience: Retired (mostly)
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1. An organizational entity (LLC v Corp)?

A: An S Corp is, in some ways, an anachronism, because at the time of its development, LLCs had not been invented. An S Corp requires formal board meetings and written resolutions to operate, files a separate corporate tax return, whereas an LLC requires no meetings, resolution (though a well-drafted "operating agreement" is a good idea, because it controls the owners' respective rights and duties).

2. State to register entity (VA, Delaware, etc) for tax &/or legal advantage?

A: Unless you're planning on operating in multiple jurisdictions, it's silly to register anywhere other than the State in which you operate, because a foreign LLC must register in each State where it engages in business, and that means paying registration fees and submitting paperwork to multiple states -- and potentially filing multiple State tax returns.

3. Can I make deductions for equipment & training expenses already purchased that will be my contribution to the business?

A: No. Any equipment purchase must be made from the LLC accounts and after the establishment of the LLC in order to be deductible. If you were to sell your personal equipment to the LLC, then the LLC could deduct, but you would incur taxable income, and the deduction would wash out the income, leaving you with a net $0 tax effect.

4. What implications should I consider associating with my foreign investor (Belize shop owner to whom I will refer business) if he contributes funds?

A: An S Corp must have all U.S. citizen investors, therefore it's off the table from your consideration, if you intend to have a foreign investor. The biggest consideration is that if this person decides to be uncooperative, you could find yourself hamstrung by someone who could avoid liability, because he/she can't be sued in a U.S. court (or, rather he/she can be sued, but collection enforcement of a judgment would be practically impossible. So, unless there is something in the operating agreement that permits you to manage the organization, or you maintain a majority ownership stake, you could have loads of difficulties. Also, many things that are illegal in the USA are lawful (or, at least not prosecutable in Belize), so, your partner could start doing things for which he/she would have no liability, but which could leave you "holding the bag" in the USA.

Hope this helps.

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socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39,383
Experience: Retired (mostly)
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