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I'm a tax accountant and I can give you some insight into the tax aspect of the equation. 1. I don't think that an LLC is the correct legal entity you should
by camz 16y ago
I'm a tax accountant and I can give you some insight into the tax aspect of the equation.
1. I don't think that an LLC is the correct legal entity you should be considering for your consulting arm because of self-employment tax. Many people forget that self employment tax is an expensive cost that could be avoided. You should be incorporating an S Corp to plan around the 15.3% tax. You're getting all the same benefits effectively except you'll pay less taxes.
2. I question the value of a series llc because it is a new tax entity and unproven in a number of courts. When selecting a legal entity, you don't want the new and sexy because you want security and predictability.
Having standard llcs would allow you to be sure of the legal ramifications because it is an entity that every state generally recognizes as opposed to the series llc. Also, a lot of the tax circumstances are going to be questionable because we can't be sure of their consequences.
If you're worried about filing taxes and the paper work then you could simply create a tax structure that avoids these additional returns. LLCs allow you to check the box and select passthrough tax treatment for partnerships or corporate taxes to be levied against the entity's income. Also, single member llcs are disregarded for tax purposes but retain their legal status so you could potentially avoid a number of returns.
I hope that this helps.
- rprasad 16y ago1. Not entirely correct. In most states, S Corporations pay more taxes on their income than do LLCs. Also, you don't avoid paying the self-employment tax; you just pay it in a different way, as payroll and other taxes through the S Corporation. In many states, taxes incidental to the employee relationship will end up exceeding the self-employment tax. Moreover, wages paid through an S Corporation cannot be characterized as capital gain (15% rate vs. higher), whereas income earned from an LLC can be capital gain. Also, the S Corporation has significant restrictions. The most important is that only US citizens/legal residents can be investors. If any of the restrictions is not met, the S Corporation will be taxed as a C Corporation, resulting in double taxation of income. 2. I agree; the only benefit of a series LLC is avoiding the administrative costs of forming multiple LLCs. Unfortunately, the accounting costs and hassles for a series LLC will more than swallow up the (relatively small) administrative savings. Also, the series LLC is not a new form; it's just an extension of the sub-partnership concept and will be taxed the same way. (If the corporate tax structure is selected, it each new LLC in the series will be treated as a subsidiary.) If you're worried about filing taxes, just choose the simplest form. The tax code is very simple as long as you don't try to play games with it.
- camz 16y agoI think I'm having a difficult time understanding your logic. An S-Corporation is a passthrough tax entity that doesn't pay tax on a corporate level. The income is paid on the 1040 tax return with a K1. Thus, I don't see how the S-Corp would lead to a tax that is any different than a LLC. Its effectively the same tax treatment in this case except that there is the ability to lower SE Tax. By paying a reasonable wage to the owner, the net income would be distributed as a dividend which is not self-employment income and thus would be exempt from SE Tax. Also, wages paid to an owner/employee of an S-Corporation is not required to pay FUTA (unemployment) and etc, thus the only tax that you'd be required to pay is FICA and Medicare just like everyone else. Clearly, the S Corp has a number of restrictions which ties in well with the fact that an S Corp is a "small corporation" But, for small or new companies that aren't getting major funding, this is a great option.