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Sole Proprietership vs. Contracting (LLC)
Old 12-20-2014, 04:49 PM   #1
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Sole Proprietership vs. Contracting (LLC)

Question,
I own an LLC with 2 people listed with the filed paperwork through the SecState.

I am looking at new employment, and have historically always worked as FTE either via a W2 Agency, or MegaCorp.

Would it be advantageous for me to bill through the LLC vs say Sole Proprietorship if that was offered? Would it be adventageous to negotiate without the FTE salary if I could?

I could see some good tax decucions here if I started billing through an LLC, vs accepting FTE or Sole Proprietorship.

Curious what others in the IT contracting arena have done with success...

DH covers health costs. and I would presume if there's a company match 401k or profit share, obviously that would need to be factored in, but lets assume none of those existed and I was resp for my own IRA and taxes etc either by being a Sole Proprietorship or LLC.

Also, any recommendations on billing? is there a free online tool I could use for my LLC?
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Old 12-20-2014, 04:53 PM   #2
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I would actually do an S-Corp.

You could then give yourself a dividend, after paying a smaller salary, like $50K. The rest, up to $50K would be a dividend.

The dividend would be free from the 15.3% Self employment tax. I do not think an LLC can give a dividend.

A corporation can also have quite a few deductions for cruise ship corporate meetings, meals and entertainment, home office, etc.
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Old 12-20-2014, 11:21 PM   #3
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Scorp/llc is the way to go generally. You have to manage the taxes and paperwork, which can be a lot.




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Old 12-21-2014, 08:32 AM   #4
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I would actually do an S-Corp.

You could then give yourself a dividend, after paying a smaller salary, like $50K. The rest, up to $50K would be a dividend.

The dividend would be free from the 15.3% Self employment tax. I do not think an LLC can give a dividend.

A corporation can also have quite a few deductions for cruise ship corporate meetings, meals and entertainment, home office, etc.
Sounds like a plan but I am not exactly sure what you mean by the other 50k can be a dividend.... is this referring to the itemization of a schedule E?

EDIT: I see from another website that Depending on how you divide your income, you could save a substantial amount of self-employment taxes just by converting to an S-corporation.

So I guess the question I need to answer, is how do I avoid my income to beat the regular 15.3% income tax rate?

It looks like I can initiate with a fax/file of federal Form 1120S (S corp election), and then at tax time , along with the Sched E file a federal Form 1120S (US Income Tax Return for S Corp) so long as I have a EIN (which I do have a couple of those from various LLCs).

Seems simple enough... am I missing anything? I am hoping to use this S Corp when I land the next opportunity in the new year. Thanks Senator.
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Old 12-21-2014, 08:56 AM   #5
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So I guess the question I need to answer, is how do I avoid my income to beat the regular 15.3% income tax rate?
Hypothetical situation.

Gross receipts/Income $150K
Business Expenses (Mileage, cell phone, business travel, advertising, office supplies, computers, meals and entertainment, $1500 home office, off site corporate events, dues, subscriptions, etc., healthcare)

Business Expenses $50K
Wages $60K
Dividends $40K

You just saved $6,120 in SE taxes. You can also put a lot of the $40K in a retirement plan to save even more income taxes.

There is a lot you can do when you own a business and have great business documentation.
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Old 12-21-2014, 09:00 AM   #6
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All of the above is true and the truest words were from Senator "There is a lot you can do when you own a business and have great business documentation". If you are not the sort to be on it hard regarding documentation and careful management, then you will screw yourself royally.
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Old 12-21-2014, 09:21 AM   #7
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All of the above is true and the truest words were from Senator "There is a lot you can do when you own a business and have great business documentation". If you are not the sort to be on it hard regarding documentation and careful management, then you will screw yourself royally.
my business documentation is amazing. Expense sheets that trace business use adlnd of course the receipts
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 12-21-2014, 09:23 AM   #8
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I don't know what state you are in, and I also am not giving legal advice, but if you sniff around a bit, you can use an LLC that elects flow-through taxation (e.g., taxation like a partnership). If you want a single member LLC, it can be taxed as a sole proprietorship (a disregarded entity). An S corp is also a good choice, though you have to be careful not to "blow the S election" so to speak, e.g., by giving S corp shares to an entity investor. (I have seen that happen more than once.)

In other words, an S corp or properly structured LLC can work. LLCs can generally pay distributions to the owners over and above salary, just as S corps can pay dividends. Fly any choice past your legal and tax advisors, yadda yadda, disclaim disclaim disclaim!
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Old 12-21-2014, 03:47 PM   #9
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I don't know what state you are in, and I also am not giving legal advice, but if you sniff around a bit, you can use an LLC that elects flow-through taxation (e.g., taxation like a partnership). If you want a single member LLC, it can be taxed as a sole proprietorship (a disregarded entity). An S corp is also a good choice, though you have to be careful not to "blow the S election" so to speak, e.g., by giving S corp shares to an entity investor. (I have seen that happen more than once.)

In other words, an S corp or properly structured LLC can work. LLCs can generally pay distributions to the owners over and above salary, just as S corps can pay dividends. Fly any choice past your legal and tax advisors, yadda yadda, disclaim disclaim disclaim!

I am in a state that allows me to file taxes as an S-Corp under an LLC EIN. I will talk to the Dept. of Revenue to understand which would be best.
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 12-21-2014, 09:04 PM   #10
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I will talk to the Dept. of Revenue to understand which would be best.
Talk to an accountant, not the Dept of Revenue.
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Sole Proprietorship vs. Contracting (LLC) vs. S-Corp with Little Profit
Old 12-22-2014, 10:05 AM   #11
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Sole Proprietorship vs. Contracting (LLC) vs. S-Corp with Little Profit

I have seen a lot of material explaining how to use an S-Corp to significant financial benefit when the consulting endeavors generate a fairly large profit.

My question is more about if you do not expect the consulting endeavors to generate large profits, say $25K-$40K after expenses. I can think of several scenarios where this might be the case:
  • Continuing to dabble after ER (my personal concern)
  • Consulting while maintaining current W-2 position
  • First year or two of building a practice
In this scenario, with relatively little profit after expenses, is there a clear benefit to the type of entity used:
  • Sole Proprietorship
  • LLC
  • S-Corp
  • Other
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Old 12-22-2014, 12:38 PM   #12
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LLCs and S-Corp provide liability protection, sort of. A SP would not.

I like an S-Corp because of the dividend, but if an LLC can just do pass through income, without SE taxes, they are close to the same.

You can set up a generic name, such as ABC Enterprises, so as your skills and interests change, it is still valid. Maybe at some point you will form a dog walking company, and can use the same entity as you used for IT. If there is no income, just submit a $0 tax return, or you might be able to skip it. If you build up, it's easier to start it from the beginning.

Having a separate tax entity I think also has tax advantages.
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Old 12-22-2014, 07:45 PM   #13
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LLCs and S-Corp provide liability protection, sort of. A SP would not.

I like an S-Corp because of the dividend, but if an LLC can just do pass through income, without SE taxes, they are close to the same.

You can set up a generic name, such as ABC Enterprises, so as your skills and interests change, it is still valid. Maybe at some point you will form a dog walking company, and can use the same entity as you used for IT. If there is no income, just submit a $0 tax return, or you might be able to skip it. If you build up, it's easier to start it from the beginning.

Having a separate tax entity I think also has tax advantages.

Having a separate tax entity does have its advantages. I've been filed 0 and now they don't even require me to file. Things have certainly changed since 2005. Now I can pay my quarterly taxes right online.

I do need to talk to an accountant, some things are obvious, some are not.
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 12-23-2014, 06:16 PM   #14
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Having a separate tax entity does have its advantages. I've been filed 0 and now they don't even require me to file. Things have certainly changed since 2005. Now I can pay my quarterly taxes right online.

I do need to talk to an accountant, some things are obvious, some are not.

I swear we may have had this discussion a year ago when I joined the forum lol. The dog-walking comment sort of gave me dejavu.

Well I called my State and submitted/filed all s-corp paperwork, now for the complicated part, determining how much tax to withhold... looks like nowadays I can pay taxes through e-service center for both fed and state which is nice,

About that accountant...
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FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
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Old 12-23-2014, 06:47 PM   #15
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About that accountant...
Accountants are great data entry people. You produce a P&L, they enter the same information in a TurboTax-like software, and tell you what you know already.

You need tax advice. Make sure you search the internet to get information, and talk to an aggressive tax adviser.
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