5 ms·

[deleted, i'm an idiot]

by ye 13y ago

tptacek 13y ago
In the US? What's the kind of company you're thinking about that (a) allows for external investment and (b) doesn't have limited liability?
- ye 13y ago
  [deleted, i'm an idiot]
  - tptacek 13y ago
    S Corps are limited liability corporations. Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S, and (b) it's easier to grant employees equity in an S than an LLC. (You're not an idiot.)
    - JoshTriplett 13y ago
      > Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S Interesting. Got a pointer to details on that?
      - poulsbohemian 13y ago
        See your accountant for advice on this point. Disclaimer: I am not an accountant, nor is my business set up as an S corp. The way it works is this: you form an S corp, and as the owner you pay yourself dividends rather than straight income. That way you aren't taxed at normal income tax rates but instead at the capital gains rate. At the same time, because you are now an employee of the S corp you personally only pay half the social security tax, rather than the whole bit as you would as the owner of the LLC paying both the employer and employee portions (of course the corporation is still obligated to pay the employer contribution). Accountants are of different minds on this, depending on their own taste for risk. The important question in an audit is being able to defend that the business is more than just you, IE: the income is legitimate dividends from the success of the business, and not just regular employment income masquerading as dividends. Again, consult an accountant - they really are worth the cost.
        tunesmith 13y ago
        I think this is incorrect in two ways - you do still have to pay yourself salary, and dividends are taxed at normal income rates (due to pass-through) rather than capital gains rates. It's unfortunate that they are called dividends, because stock dividends are taxed at capital gains rates.
        vonmoltke 13y ago
        Qualified stock dividends are taxed at a special capital gains rate. Unqualified dividends are taxed at the recipient's regular rate. See http://www.dividend.com/dividend-education/qualified-vs-unqualified-dividends/ http://www.dividend.com/dividend-education/qualified-vs-unqu....
        poulsbohemian 13y ago
        Curt - perhaps I could have written out explicitly "you still have to pay yourself a salary" but that was what I was trying to infer with my comment of "...because you are now an employee of the S corp..." I see you are also in Oregon, you might have better local advice for the parent poster. At a minimum, since you are both local to Portland you should meet up for a beer. ;-)
        stevenwei 13y ago
        They are technically called distributions, not dividends, for the reasons you mentioned.
        theli0nheart 13y ago
        I think you're using incorrect terminology here. Dividends comprise capital that is distributed from a C Corp, and have a special taxation structure that is separate from ordinary income.
      - poulsbohemian 13y ago
        Josh - I see you are based in Portland (hello "neighbor!" - I'm about a 4 hour drive east from you). You'd probably be just as well off moving over the river to shed the Oregon state income tax (sorry Oregon, I love you but...). Setting up an LLC in either Oregon or Washington is trivial. Setting up an S or C corp in Washington (I've never done it in OR) is also really easy, but does involve more paperwork. Especially in the early days of a business, there are so many advantages to setting up an LLC that I'd be surprised if an accountant advised otherwise. Have a deep-pocketed investor ready to go? That's the only case where I can imagine that setting up a C corp from the beginning makes sense.
      - tunesmith 13y ago
        It's not as sketchy as it used to be, due to some rules changes in the last few years. As a one-person S-Corp, you run payroll and you are your own employee. You can set your salary, and you can also pay yourself in distributions. Salary is subject to FICA, distributions are not. Both are subject to income tax. When you pay yourself salary, your "personal" side pays its half of the FICA, and your "business" side pays the other. This is the same way a regular employer/employee relationship works (and why it "feels" like you are paying double FICA when you're self-employed; it's because you are both the employee and the employer). It used to be that you could severely limit your salary, and pay yourself the bulk of your income through distributions, and lower your tax bill by having lower FICA costs. These days, it is your responsibility to pay yourself a "reasonable salary", as in something you could reasonably defend during an audit. Once you have paid yourself a reasonable salary (which is subject to FICA), you can give yourself more money (revenue permitting :) ) in distributions. Also, if your self-employment is part-time, you can pro-rate your salary to reflect that part-time employment. It's also worth noting that as your business gets successful and long-term, you may want to increase your salary and pay into FICA so you can get a better social security payment when you retire. But still, if you analyze it in a spreadsheet, you'll see that social security, as an annuity, is a "bad deal" when you're paying both sides. (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)
        tptacek 13y ago
        As I understand it, reasonable though your claimed salary might be, if you're making money on the difference between distros and salary (which stops being an issue at around the 100k point), you're filing returns with a big red audit flag on them. The tax savings probably aren't worth the heartache for a lot of people. Not for nothing, but as an entrepreneur who has been in exactly the situation contemplated by this scheme: avoiding taxes by structuring your income as a "distribution" rather than salary is shady. I think it's unethical. People that don't happen to run S Corps don't get to do it. I'm prepared to lose the argument, so let me concede it in advance and avoid polluting the thread.
        tunesmith 13y ago
    - protomyth 13y ago
      I thought part of the problem with LLCs was a state issue?
    - theli0nheart 13y ago
      S Corps aren't necessarily LLCs. A C Corp can elect to be taxed as an S Corp as well.
  - coldpie 13y ago
    Respectfully, please don't delete posts. Edit in a warning at the top that you were wrong and realize it or something. People reading these conversations later now have no context, which is frustrating.
tjbiddle 13y ago
I'm mimicing tptacek's question here, but what type of corporation (Assuming this is in the US) wouldn't protect assets? Even an LLC with just one person operating it (Which the IRS still sees as a sole-proprietorship I believe) still has their personal assets covered.
- gte910h 13y ago
  Eh, sorta? You have to do a lot of things right to get that protection. many disregarded entities, don't http://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html http://www.nolo.com/legal-encyclopedia/personal-liability-pi... : There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
  - tjbiddle 13y ago
    Oh yeah, definitely. There shouldn't be any mix of assets. You need to keep them separate if you're trying to make the legal case that they're separate.
deleted 13y ago
[deleted]

[deleted, i'm an idiot]

by ye 13y ago

[deleted, i'm an idiot]

In the US? What's the kind of company you're thinking about that (a) allows for external investment and (b) doesn't have limited liability?

ye 13y ago
[deleted, i'm an idiot]
- tptacek 13y ago
  S Corps are limited liability corporations. Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S, and (b) it's easier to grant employees equity in an S than an LLC. (You're not an idiot.)
  - JoshTriplett 13y ago
    > Lots of LLCs turn themselves into S Corps, because (a) there's an old sketchy tax dodge about self-employment/FICA tax you can do as an S Interesting. Got a pointer to details on that?
    - poulsbohemian 13y ago
      See your accountant for advice on this point. Disclaimer: I am not an accountant, nor is my business set up as an S corp. The way it works is this: you form an S corp, and as the owner you pay yourself dividends rather than straight income. That way you aren't taxed at normal income tax rates but instead at the capital gains rate. At the same time, because you are now an employee of the S corp you personally only pay half the social security tax, rather than the whole bit as you would as the owner of the LLC paying both the employer and employee portions (of course the corporation is still obligated to pay the employer contribution). Accountants are of different minds on this, depending on their own taste for risk. The important question in an audit is being able to defend that the business is more than just you, IE: the income is legitimate dividends from the success of the business, and not just regular employment income masquerading as dividends. Again, consult an accountant - they really are worth the cost.
      - tunesmith 13y ago
        I think this is incorrect in two ways - you do still have to pay yourself salary, and dividends are taxed at normal income rates (due to pass-through) rather than capital gains rates. It's unfortunate that they are called dividends, because stock dividends are taxed at capital gains rates.
        vonmoltke 13y ago
        Qualified stock dividends are taxed at a special capital gains rate. Unqualified dividends are taxed at the recipient's regular rate. See http://www.dividend.com/dividend-education/qualified-vs-unqualified-dividends/ http://www.dividend.com/dividend-education/qualified-vs-unqu....
        poulsbohemian 13y ago
        Curt - perhaps I could have written out explicitly "you still have to pay yourself a salary" but that was what I was trying to infer with my comment of "...because you are now an employee of the S corp..." I see you are also in Oregon, you might have better local advice for the parent poster. At a minimum, since you are both local to Portland you should meet up for a beer. ;-)
        stevenwei 13y ago
        They are technically called distributions, not dividends, for the reasons you mentioned.
      - theli0nheart 13y ago
        I think you're using incorrect terminology here. Dividends comprise capital that is distributed from a C Corp, and have a special taxation structure that is separate from ordinary income.
    - poulsbohemian 13y ago
      Josh - I see you are based in Portland (hello "neighbor!" - I'm about a 4 hour drive east from you). You'd probably be just as well off moving over the river to shed the Oregon state income tax (sorry Oregon, I love you but...). Setting up an LLC in either Oregon or Washington is trivial. Setting up an S or C corp in Washington (I've never done it in OR) is also really easy, but does involve more paperwork. Especially in the early days of a business, there are so many advantages to setting up an LLC that I'd be surprised if an accountant advised otherwise. Have a deep-pocketed investor ready to go? That's the only case where I can imagine that setting up a C corp from the beginning makes sense.
    - tunesmith 13y ago
      It's not as sketchy as it used to be, due to some rules changes in the last few years. As a one-person S-Corp, you run payroll and you are your own employee. You can set your salary, and you can also pay yourself in distributions. Salary is subject to FICA, distributions are not. Both are subject to income tax. When you pay yourself salary, your "personal" side pays its half of the FICA, and your "business" side pays the other. This is the same way a regular employer/employee relationship works (and why it "feels" like you are paying double FICA when you're self-employed; it's because you are both the employee and the employer). It used to be that you could severely limit your salary, and pay yourself the bulk of your income through distributions, and lower your tax bill by having lower FICA costs. These days, it is your responsibility to pay yourself a "reasonable salary", as in something you could reasonably defend during an audit. Once you have paid yourself a reasonable salary (which is subject to FICA), you can give yourself more money (revenue permitting :) ) in distributions. Also, if your self-employment is part-time, you can pro-rate your salary to reflect that part-time employment. It's also worth noting that as your business gets successful and long-term, you may want to increase your salary and pay into FICA so you can get a better social security payment when you retire. But still, if you analyze it in a spreadsheet, you'll see that social security, as an annuity, is a "bad deal" when you're paying both sides. (It's a very good deal as a W-2 employee with someone else paying the employer half, though.)
      - tptacek 13y ago
        As I understand it, reasonable though your claimed salary might be, if you're making money on the difference between distros and salary (which stops being an issue at around the 100k point), you're filing returns with a big red audit flag on them. The tax savings probably aren't worth the heartache for a lot of people. Not for nothing, but as an entrepreneur who has been in exactly the situation contemplated by this scheme: avoiding taxes by structuring your income as a "distribution" rather than salary is shady. I think it's unethical. People that don't happen to run S Corps don't get to do it. I'm prepared to lose the argument, so let me concede it in advance and avoid polluting the thread.
        tunesmith 13y ago
  - protomyth 13y ago
    I thought part of the problem with LLCs was a state issue?
  - theli0nheart 13y ago
    S Corps aren't necessarily LLCs. A C Corp can elect to be taxed as an S Corp as well.
- coldpie 13y ago
  Respectfully, please don't delete posts. Edit in a warning at the top that you were wrong and realize it or something. People reading these conversations later now have no context, which is frustrating.

tjbiddle 13y ago

I'm mimicing tptacek's question here, but what type of corporation (Assuming this is in the US) wouldn't protect assets? Even an LLC with just one person operating it (Which the IRS still sees as a sole-proprietorship I believe) still has their personal assets covered.

gte910h 13y ago
Eh, sorta? You have to do a lot of things right to get that protection. many disregarded entities, don't http://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html http://www.nolo.com/legal-encyclopedia/personal-liability-pi... : There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
- tjbiddle 13y ago
  Oh yeah, definitely. There shouldn't be any mix of assets. You need to keep them separate if you're trying to make the legal case that they're separate.

deleted 13y ago

[deleted]