5 ms·

People often set up an LLC for their consulting thinking it will help with 1) taxes and 2) liability. But neither of those are quite right: 1) the same tax de

People often set up an LLC for their consulting thinking it will help with 1) taxes and 2) liability. But neither of those are quite right: 1) the same tax deductions are available on your normal schedule C 2) while acting on behalf of your LLC you’re still personally liable for your actions (let alone your illegal schemes).

cmeacham98 5y ago
From my understanding, an LLC does help with _financial_ liability - if the company fails and goes bankrupt, your personal assets generally won't be on the line. Obviously, an LLC cannot shield you from criminal liability.
- zrail 5y ago
  Small time LLCs are not going to get so much as a credit card without a personal guarantee. Sometimes you can get loans from the company doing your payment processing but only because they're directly involved and can see your cash flow. (disclaimer: I work for Stripe which had a product that works like that, but not anywhere near that team)
  - nilsbunger 5y ago
    What this person said. You'll almost always have a personal guarantee on a loan. And if it's just you consulting, you don't typically have assets in the LLC to borrow against anyway.
- jacquesm 5y ago
  Not necessarily, see 'piercing the corporate veil'.
  - dahfizz 5y ago
    Sure, but this is the exception that proves the rule: > generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability... As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil LLCs still protect personal assets in the general case.
    - jacquesm 5y ago
      That's fair in the general case. But in those cases where execs are using them to commit otherwise illegal activities it should be no surprise that it occurs far more frequently than that.
    - nilsbunger 5y ago
      An LLC doesn't help you against your own actions: "forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business" from https://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html https://www.nolo.com/legal-encyclopedia/limited-liability-pr...
rsyring 5y ago
Subchapter S corporations or LLCs facilitate paying yourself distributions, which are exempt from Medicare and Social Security taxes, saving you an initial 15%. Although, there are details and caveats to be aware of. I don't know of any way to get that benefit without a corporation.
- sokoloff 5y ago
  Social Security stops at something under $150K per year. If you’re going to try to avoid it by paying no salary and all distributions for work that you personally did, you’ll likely fall afoul of the “reasonable salary” test, designed to prevent exactly this.
  - twodave 5y ago
    You don't avoid it all via the S-Corp. You just avoid the half the employer (in this case, also you) normally pays. I'm not a tax accountant or a lawyer, just happen to run my own consulting through an S-Corp. I still pay myself around half of the net revenue the S-Corp brings in as a regular employee, and that portion is taxed under FICA.
  - mdorazio 5y ago
    Everyone needs to understand this. I’ve had two friends get audited and fined for massively underpaying themselves for contract work via their LLCs. Many of the people I run into who claim all kinds of benefits from this route are actually commiting low level tax fraud, knowingly or otherwise.
    - camgunz 5y ago
      100% this, get an accountant and maybe a lawyer. It is very, very worth it.
      - brianwawok 5y ago
        Many accountants make a living doing this. Many are also setup as s-corps taking low salary. You need to educate yourself and Understand the risks/rewards
mbesto 5y ago
> People often set up an LLC for their consulting thinking it will help with 1) taxes and 2) liability. I have a highly paid accountant who says otherwise. Care to elaborate?
- nilsbunger 5y ago
  See up-thread, I guess? There is some nuance to it for sure.
camgunz 5y ago
It can depend and IANAL buuuut I do have an LLC taxed as an S Corp, because you can dramatically reduce your tax burden. Essentially you buffer your money in your LLC and pay yourself a "reasonable salary". For example: maybe you earn $200k this year as a software contractor. You go to glassdoor and find that mean salary for software engineers is $96k/yr. You pay yourself $8k/mo (pre-tax), deducting payroll taxes and putting $1,650 (the max contribution) into a 401k. You also max out your 25% 401k business contribution at another $2k. Depending on state taxes, your total tax burden is something like 19%, after you've put $43,500 into retirement. If you didn't have an LLC, it'd be closer to 30% (or higher, ugh) with only $19,500 in retirement. In raw dollars, in this hypothetical you're down ~$24k. Your business also gets tax breaks you don't, namely on (paying for your) health care, (paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services. Further, the cap on business 401k accounts is way, way higher [1]. The ability to sock away even more pre-tax money in a retirement account, and deduct your health insurance from your taxes is insane. The biggest downsides, at least for me, have been the infra to get it all going. I have an accountant, a lawyer, a financial planner, and an army of online services that help me stay legal and paid up. That said, I'm still coming out ahead (e.g. they don't cost $24k/yr and you guessed it, startup costs are tax deductible), so the gains are there. (I think paying taxes is patriotic, but I don't think it's reasonable to pay taxes on $200k of income for one year, and then only make $60k of income the next year. I also don't think it's reasonable for me to pay ~40% of my income in taxes while big corporations and the rich pay very little so....) [1]: https://www.fidelity.com/learning-center/personal-finance/retirement/self-employed-401k https://www.fidelity.com/learning-center/personal-finance/re...
- tptacek 5y ago
  See below; this S-corp "reasonable salary" thing was called out to me as an audit flag by my accountant, and other people have stories of friends being audited. It's not worth it (and the ethics of it aren't great; most people can't work for S-corps they own, and can't avail themselves of this "favorable treatment".)
  - camgunz 5y ago

cmeacham98 5y ago

From my understanding, an LLC does help with _financial_ liability - if the company fails and goes bankrupt, your personal assets generally won't be on the line. Obviously, an LLC cannot shield you from criminal liability.

zrail 5y ago
Small time LLCs are not going to get so much as a credit card without a personal guarantee. Sometimes you can get loans from the company doing your payment processing but only because they're directly involved and can see your cash flow. (disclaimer: I work for Stripe which had a product that works like that, but not anywhere near that team)
- nilsbunger 5y ago
  What this person said. You'll almost always have a personal guarantee on a loan. And if it's just you consulting, you don't typically have assets in the LLC to borrow against anyway.
jacquesm 5y ago
Not necessarily, see 'piercing the corporate veil'.
- dahfizz 5y ago
  Sure, but this is the exception that proves the rule: > generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability... As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil LLCs still protect personal assets in the general case.
  - jacquesm 5y ago
    That's fair in the general case. But in those cases where execs are using them to commit otherwise illegal activities it should be no surprise that it occurs far more frequently than that.
  - nilsbunger 5y ago
    An LLC doesn't help you against your own actions: "forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business" from https://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html https://www.nolo.com/legal-encyclopedia/limited-liability-pr...

rsyring 5y ago

Subchapter S corporations or LLCs facilitate paying yourself distributions, which are exempt from Medicare and Social Security taxes, saving you an initial 15%. Although, there are details and caveats to be aware of. I don't know of any way to get that benefit without a corporation.

sokoloff 5y ago
Social Security stops at something under $150K per year. If you’re going to try to avoid it by paying no salary and all distributions for work that you personally did, you’ll likely fall afoul of the “reasonable salary” test, designed to prevent exactly this.
- twodave 5y ago
  You don't avoid it all via the S-Corp. You just avoid the half the employer (in this case, also you) normally pays. I'm not a tax accountant or a lawyer, just happen to run my own consulting through an S-Corp. I still pay myself around half of the net revenue the S-Corp brings in as a regular employee, and that portion is taxed under FICA.
- mdorazio 5y ago
  Everyone needs to understand this. I’ve had two friends get audited and fined for massively underpaying themselves for contract work via their LLCs. Many of the people I run into who claim all kinds of benefits from this route are actually commiting low level tax fraud, knowingly or otherwise.
  - camgunz 5y ago
    100% this, get an accountant and maybe a lawyer. It is very, very worth it.
    - brianwawok 5y ago
      Many accountants make a living doing this. Many are also setup as s-corps taking low salary. You need to educate yourself and Understand the risks/rewards

mbesto 5y ago

> People often set up an LLC for their consulting thinking it will help with 1) taxes and 2) liability. I have a highly paid accountant who says otherwise. Care to elaborate?

nilsbunger 5y ago
See up-thread, I guess? There is some nuance to it for sure.

camgunz 5y ago

It can depend and IANAL buuuut I do have an LLC taxed as an S Corp, because you can dramatically reduce your tax burden. Essentially you buffer your money in your LLC and pay yourself a "reasonable salary". For example: maybe you earn $200k this year as a software contractor. You go to glassdoor and find that mean salary for software engineers is $96k/yr. You pay yourself $8k/mo (pre-tax), deducting payroll taxes and putting $1,650 (the max contribution) into a 401k. You also max out your 25% 401k business contribution at another $2k. Depending on state taxes, your total tax burden is something like 19%, after you've put $43,500 into retirement. If you didn't have an LLC, it'd be closer to 30% (or higher, ugh) with only $19,500 in retirement. In raw dollars, in this hypothetical you're down ~$24k. Your business also gets tax breaks you don't, namely on (paying for your) health care, (paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services. Further, the cap on business 401k accounts is way, way higher [1]. The ability to sock away even more pre-tax money in a retirement account, and deduct your health insurance from your taxes is insane. The biggest downsides, at least for me, have been the infra to get it all going. I have an accountant, a lawyer, a financial planner, and an army of online services that help me stay legal and paid up. That said, I'm still coming out ahead (e.g. they don't cost $24k/yr and you guessed it, startup costs are tax deductible), so the gains are there. (I think paying taxes is patriotic, but I don't think it's reasonable to pay taxes on $200k of income for one year, and then only make $60k of income the next year. I also don't think it's reasonable for me to pay ~40% of my income in taxes while big corporations and the rich pay very little so....) [1]: https://www.fidelity.com/learning-center/personal-finance/retirement/self-employed-401k https://www.fidelity.com/learning-center/personal-finance/re...

tptacek 5y ago
See below; this S-corp "reasonable salary" thing was called out to me as an audit flag by my accountant, and other people have stories of friends being audited. It's not worth it (and the ethics of it aren't great; most people can't work for S-corps they own, and can't avail themselves of this "favorable treatment".)
- camgunz 5y ago