LLC tax question

[WM]

I've been trying to get set up as an independent contractor, and established an LLC this year for liability and greater credibility with clients. I don't intend to ever grow the business beyond myself, so incorporating seemed like overkill.

I had some income this year from contracting (two different clients), and have been making estimated quarterly payments.

Now that I'd getting started on my 1040, I see that I can choose to file the LLC income as a sole proprietor or as a corporation. What I can't find, though, is information on how to choose or what the implications are. Anyone know where to look? Or have any answers? I've already tried the SBA site and my local SCORE chapter, but all they do is tell me the choices, not why either one might be better for me.

 

[jimnjana]

When you filed for your LLC with your state, if you are the only person on the incorporation document, you can file as sole proprietor. What matters for liability, is your incorporation as LLC. You can run the numbers both ways in your tax software, I don't believe you will have any difference in tax computation.

 

[WM]

Hmm... yes, that's a good idea to try it both ways and see what happens.

In the meantime, I've discovered that in CA, I can avoid the $800 minimum tax bill on LLCs if I file as a corporation. So I guess that's one reason people would file as a corp. in CA.

My taxable income would need to be around 28k to require $800 in taxes, which doesn't seem all that likely to happen, it will probably be less. Or at least not much more than that.

Edit: never mind about the $800, upon further investigation, corporations have to pay it too. Although they do get a pass the first year.

 

[jimnjana]

Hmm... yes, that's a good idea to try it both ways and see what happens.

In the meantime, I've discovered that in CA, I can avoid the $800 minimum tax bill on LLCs if I file as a corporation. So I guess that's one reason people would file as a corp. in CA.

My taxable income would need to be around 28k to require $800 in taxes, which doesn't seem all that likely to happen, it will probably be less. Or at least not much more than that.

Edit: never mind about the $800, upon further investigation, corporations have to pay it too. Although they do get a pass the first year.

do you have to pay it if you are incorporated in another state? This can be done for probably much less than $800.

 

[Martha]

The $800 dollar fee is a franchise tax for the privilege of doing business in California. I believe that it applies no matter where you entity is formed.

WM, I can't advise you on your specific situation but it would be rare for a single person LLC to chose to be treated as anything other than a sole proprietorship, where the entity is ignored for income tax purposes. If you chose to be taxed as a corporation there will be two potential levels of taxation. And potentially a lot more paperwork. Once you chose you may be stuck. Running the numbers for one year could give you a misleading picture.

You should ask your accountant or lawyer.

 

[WM]

Yes, the tax/fee is regardless of where the business is organized. But thanks for the ideas, jimnjana.

Thanks for the general thoughts, Martha. My LLC is not in any way complicated or unusual as far as work or income. The fact that several hours of reasonably diligent searching hasn't turned up much information suggests to me that the corporation election is likely to be more relevant or useful for larger entities (there is another CA fee, for instance, levied on LLCs with income over $250K unless they file as corporations).

I would much prefer the simplicity of pass-through, and will likely go that route until I find some compelling reason to change.

 

[deserat]

The $800 dollar fee is a franchise tax for the privilege of doing business in California. I believe that it applies no matter where you entity is formed.

WM, I can't advise you on your specific situation but it would be rare for a single person LLC to chose to be treated as anything other than a sole proprietorship, where the entity is ignored for income tax purposes. If you chose to be taxed as a corporation there will be two potential levels of taxation. And potentially a lot more paperwork. Once you chose you may be stuck. Running the numbers for one year could give you a misleading picture.

You should ask your accountant or lawyer.

WM - what Martha said - I'm doing the same thing this year - I did quarterly taxes, but based on my quarterly actual income (minus expenses) and not truly estimated and quarterly averaged. I set up my LLC in FL, so no state income tax, but a yearly registration fee for recognition as an LLC (plus the EIN with the federal government). However, the LLC is treated as a sole proprietorship, so I file with my individual tax form using the different Schedules and not as a separate tax-paying entity (like a corporation). In fact, I had to call the IRS about a tax issue this year - and got bounced between the business division and personal dvision - they even scratched their heads a bit as the EIN is really a 'mask' for my SSN when filing taxes.

Good luck - I left CA in time and although a beautiful state with lots of fun stuff to see and do - WAY too expensive for a middle class engineer. 50-60% of my income was for taxes - combo federal, state, property and other fees and levies CA finds to collect.

 

[TooFrugal]

What I can't find, though, is information on how to choose or what the implications are. Anyone know where to look?

Nolo Press has some good DIY books on choosing the right entity type for your business. I think most people with single member LLCs would choose to be taxed as a disregarded entity for tax purposes.

 

[jimnjana]

WM

I found this summary of the implications of type business structure doing a quick search, Sole Proprietorship vs Partnership vs Limited Liability Company (LLC), vs Corp

I thought CCH had an online small business owner site but I cannot find it...

 

[WM]

WM

I found this summary of the implications of type business structure doing a quick search, Sole Proprietorship vs Partnership vs Limited Liability Company (LLC), vs Corp

I thought CCH had an online small business owner site but I cannot find it...

Thanks! This was good to review again, as my LLC is just over a year old and I still feel kind of new at this. Although once again, under the LLC section, it mentions the "benefit" of being able to choose how you want to be taxed without explaining why it's a benefit. And choosing to be an LLC taxed as a corporation presumably has different (fewer?) implications than changing my business structure from and LLC to a corporation. So I feel there is some information missing...