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Business Management question for any contractors <moo 11-29-2006
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Posted by Matt Whiting on November 29, 2006, 5:08 pm
Bob Morrison wrote:
> In a previous post moo@anonamoo.com wrote...
>
>>So I am thinking about going LLC because its the next step up
>>
>>Although I have been reading that in this state they can still come after
>>personal assets even if its not gross negligence. basically the judge
>>decides if you are personally liable in the case of a small company. I am
>>guessing they probably always side against the owner.
>>
>
>
> Most likely there will be no liability protection advantages, but
> there may be some tax advantages to going LLC (S Corp). I think you will
> need to hire an accountant to make recommendations for your particular
> situation.

Bob, it sounds like you are saying that an LLC is the same as an S Corp,
but that isn't my understanding. Did I read incorrectly what you wrote
above?

Matt

Posted by Bob Morrison on November 29, 2006, 6:32 pm
In a previous post Matt Whiting wrote...
> > Most likely there will be no liability protection advantages, but
> > there may be some tax advantages to going LLC (S Corp). I think you will
> > need to hire an accountant to make recommendations for your particular
> > situation.
>
> Bob, it sounds like you are saying that an LLC is the same as an S Corp,
> but that isn't my understanding. Did I read incorrectly what you wrote
> above?

My thinking was that in order to get the tax advantages one must organize
as an S Corporation under federal law. From the IRS web site:

        A Limited Liability Company (LLC) is a relatively new business
        structure allowed by state statute.

        LLCs are popular because, similar to a corporation, owners have
        limited personal liability for the debts and actions of the LLC.
        Other features of LLCs are more like a partnership, providing
        management flexibility and the benefit of pass-through taxation.

        Single Member LLCs

        Generally, when an LLC has only one member, the fact that it is an
        LLC is ignored or “disregarded” for the purpose of filing a federal
        tax return. Remember, this is only a mechanism for tax purposes. It
        doesn’t change the fact that the business is legally a Limited
        Liability Company.

If you organize as an S Corporation the last paragraph regarding filing as
an individual is no longer true. So, for the best of both worlds one can
organize as an LLC and an S Corporation.

However, I should mention that the LLC structure does nothing for the
protection of the professional engineer who is a sole practitioner. In
most jurisdictions both the company and the engineer personally are liable
for errors and can both be involved in litigation. The lawyers will
generally go after whichever entity has the most assets. So, you could
form an LLC and have the E&O policy in the name of the LLC. In that case
the lawyers would most likely leave your personal assets alone.

--
Bob Morrison, PE, SE
R L Morrison Engineering Co
Structural & Civil Engineering
Poulsbo WA
bob at rlmorrisonengr dot com

Posted by dpb on November 30, 2006, 8:53 am

Bob Morrison wrote:
....

> My thinking was that in order to get the tax advantages one must organize
> as an S Corporation under federal law. From the IRS web site:
>
...
>         Single Member LLCs
>
>         Generally, when an LLC has only one member, the fact that it is an
>         LLC is ignored or "disregarded" for the purpose of filing a federal
>         tax return. Remember, this is only a mechanism for tax purposes. It
>         doesn't change the fact that the business is legally a Limited
>         Liability Company.
>
> If you organize as an S Corporation the last paragraph regarding filing as
> an individual is no longer true. So, for the best of both worlds one can
> organize as an LLC and an S Corporation.
...

I don't think you can do that for a single entity -- it has to be one
or the other. As a practical matter, I can't see any advantage
whatsoever for trying to retain a single-partner LLC as a
parallel/duplicate entity if one has incorporated. There's more
isolation under the corporation articles than under an LLC in most
state's rules, anyway, plus you've already pointed out that there's no
(federal) tax advantage whatsoever w/ a single-member LLC (and states
I'm familiar with follow federal rules in that area as well altho I
suppose there are some that might have their own rules that deviate
there.)

On the professional liability issue, I agree.

The upshot of the whole thread is OP needs to get competent legal and
accounting advice for his locality and position rather than relying on
word-of-mouth from friends and relatives and usenet. Altho some advice
here is worthwhile background, it's not worth much more than the fees
paid. :)

IMO, ymmv, $0.02, etc., etc., etc., ... :)


Posted by Fran Bragg on November 30, 2006, 12:52 pm

>
> Bob Morrison wrote:
> ....
>
>> My thinking was that in order to get the tax advantages one must organize
>> as an S Corporation under federal law. From the IRS web site:
>>
> ...
>> Single Member LLCs
>>
>> Generally, when an LLC has only one member, the fact that it is an
>> LLC is ignored or "disregarded" for the purpose of filing a federal
>> tax return. Remember, this is only a mechanism for tax purposes. It
>> doesn't change the fact that the business is legally a Limited
>> Liability Company.
>>
>> If you organize as an S Corporation the last paragraph regarding filing
>> as
>> an individual is no longer true. So, for the best of both worlds one can
>> organize as an LLC and an S Corporation.
> ...
>
> I don't think you can do that for a single entity -- it has to be one
> or the other.


My company is an LLC but we elect to be treated as a Sub-S for tax purposes.
(There is a form to fill out for the IRS) I think that's what he is
referring to. You get the tax benefits of a Sub-S but the simplicity of the
LLC in everything else.

Fran



Posted by dpb on November 30, 2006, 3:26 pm

Fran Bragg wrote:
> >
> > Bob Morrison wrote:
> > ....
> >
> >> My thinking was that in order to get the tax advantages one must organize
> >> as an S Corporation under federal law. From the IRS web site:
> >>
> > ...
> >> Single Member LLCs
> >>
> >> Generally, when an LLC has only one member, the fact that it is an
> >> LLC is ignored or "disregarded" for the purpose of filing a federal
> >> tax return. Remember, this is only a mechanism for tax purposes. It
> >> doesn't change the fact that the business is legally a Limited
> >> Liability Company.
> >>
> >> If you organize as an S Corporation the last paragraph regarding filing
> >> as
> >> an individual is no longer true. So, for the best of both worlds one can
> >> organize as an LLC and an S Corporation.
> > ...
> >
> > I don't think you can do that for a single entity -- it has to be one
> > or the other.
>
>
> My company is an LLC but we elect to be treated as a Sub-S for tax purposes.
> (There is a form to fill out for the IRS) I think that's what he is
> referring to. You get the tax benefits of a Sub-S but the simplicity of the
> LLC in everything else.
...

Hmmm....I didn't know the IRS gave LLC's that option. If that is so, I
can see it. (I guess what I mean is "that being so" as I certainly
can't argue against what you're doing. )

I was only aware of the section above the Robert had posting on
treating single-member LLCs as sole proprietorships, so I stand
corrected and guess this qualifies as my "new for the day" item... :)


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