taxes

**Chris** · 12-15-2005, 09:03 PM

The difference in what you pay is huge. If you keep your income in your individual name, you'll pay taxes on your entire income. On the other hand, if you run everything through a legal entity, you're able to subtract legitimate business expenses from your income and then pay taxes on the profit.

You can subtract business expenses without a making a seperate entity. Not that making a seperate entity isn't a good idea, but this isn't one of the benefits. A sole proprietor can deduct business expenses fine.

**Dural** · 12-16-2005, 06:57 AM

Yup, I looked it up and you're right, Chris. Thanks for clarifying that.

I suppose the major benefit is liability protection.

**Chris** · 12-16-2005, 07:43 AM

yup, thats the main one.

So you have a C Corp? Most small businesses get S corps for the tax benefits.

**Dural** · 12-16-2005, 08:27 AM

The main reason I use a C corporation is because it provides greater separation between myself and my business. I have a medical condition that costs about $200,000 per year to keep at bay, and by hiding all of my income through a rather complicated structure of LLC's, corporations, and trusts, I'm able to legally claim that I'm broke and pass on 100% of these expenses to Medicaid. So, my situation is different than the average business owner.

Still, I think S corporations are a horrible choice for most business owners that want transparent tax flow-through. It's been a while since I studied it, but if I remember correctly, S corporations cannot sell shares to non-US residents, nor can they have more than 100 shareholders. LLC's don't have either of those limitations. In general, I've also found LLC's to be much easier to maintain and explain to investors. Liability coverage is the same.

Of course, if you don't ever plan to have investors, I don't suppose it matters that much.

One last note. C corporations have several tax advantages when you're working with shareholders. I can't recall exactly what they are, but it's worth it when you're working on a large-scale. Of course, when you get to that point, it's worth shelling out $500 an hour for a tax attorney to make you bulletproof.

**Chris** · 12-16-2005, 08:42 AM

LLCs can't have more than 20 share holders... but it might differ from state to state.

LLCs also can't issue dividends, the profits just automatically pass through. Whereas with an S corp you can pay yourself a salary and issue dividends and the dividends will only be taxed at 15% (or whatever capital gains is at).

**Westech** · 12-16-2005, 10:41 AM

My understanding was that an LLC allows you to pay yourself a set salary that is reasonable (as interpreted by the IRS) for the type of job you do for the LLC. This salary would be fully taxable for regular income tax plus the 14% self-employed social security tax. Any additional income can be taken as capital gains from ownership of the LLC and is taxed at a lower rate. This sounds similar to what you're describing for an S-corp, Chris.

Am I mistaken about the ability to do this with an LLC? I actually have a meeting scheduled with a lawyer/accountant to discuss setting up an LLC, so I guess I'll find out soon enough.

**Chris** · 12-16-2005, 11:07 AM

I think you have them switched Westech.

**Dural** · 12-16-2005, 01:03 PM

It might vary by state. I'm a part owner in eight LLC's right now, spread between North Carolina, South Carolina, and Mississippi. In three of those, the LLC pays the managing member a salary. One LLC has 34 members, the last time I checked. No problems.