LLC for a contract?

[RoyGBiv]

Until he gets 1 million in gross sales there is no franchise tax.

In that case, can someone explain this? http://www.window.state.tx.us/taxinfo/f ... rates.html" onclick="window.open(this.href);return false;
Did they put the fine print on a different web page? (possible, it's the government)

See here:
http://www.window.state.tx.us/taxinfo/t ... 05-394.pdf" onclick="window.open(this.href);return false;
From top of page 1, right hand column...
"What’s New for 2010?
The threshold to qualify to file a No Tax Due Information Report
has increased to $1 million."

However... as Skiprr said above... You still need to file a "no tax due" report... paperwork, yes.. payment, no.

Beiruty,
If you don't mind, could you circle back after everything is settled and give us a summary of the differences in practice between operating as a limited liability company vs. independent contractor (presumably sole proprietorship) paid via 1099. I've had principles of accounting and basic business law, so I understand the theoretical differences between business types, but classes never seem to cover practical issues like the actual paperwork/filings required, the differences (if any) in tax burdens, and quirky stuff like whether you would pay unemployment insurance as the sole member (and sole employee) of an LLC and (if so) can you lay yourself off and collect UI benefits.

Thanks!

Here's my $0.02...
From a TAX standpoint, there may be little difference.
As a single member LLC, most will choose to file LLC taxes as a Sub-S corp... (you need to make this election soon after forming the company... important!). As a Subchapter-S corp, all the earnings from the company will flow to you as "personal income"... The LLC (your accountant) will give you (the LLC owner) a K-1 (instead of a 1099) and then you fill out the appropriate 1040 form to account for this income on your personal taxes.... Thus avoiding being taxed at the corporate level, then again at the personal level (double taxed)... That's why making the Sub-S election is so important... and it's easy to forget.

As an IC, the net effect for tax purposes (in theory) should be identical. Instead of the LLC giving you a K-1, your customer will send you a 1099 with the same number on it.... HOWEVER.... As an LLC you have some advantages... such as being able to write off expenses directly related to carrying out your business.. Example: reimbursement for miles driven from your "office" (the LLC's primary place of business) to the job site... There are other accounting plusses... talk with a good small business accountant.

The paperwork burden for an LLC is definitely greater than for an IC... An IC gets a 1099 and that's all... An LLC will first incorporate (see my earlier post), then file taxes annually (federal, state) and pay quarterly withholdings (on wages paid to you, the employee/owner) to both federal and state (SS, medicare, federal tax, etc.).

The paperwork burden is not so bad, once you have a list of what needs to be filed and when... that's the real pain.

The paperwork burden can be offset by many things that you can do under an LLC that you cannot do as a 1099 contractor... For example... Retirement.... As a 1099 employee, you can contribute ~$15,000 to an IRA. That's it... Under a Sub-S, you can set up a SEP-IRA... The SEP allows you (assuming you can afford it) to contribute up to 25% of your income to your IRA and shelter it from tax.... If you are lucky enough to earn $200K, you can put up to $42,000 into a SEP, resulting in a ~$12,000 tax savings (assuming 30% marginal rate)... This is just one example...

So.... enough babbling... Summary
A 1099 contract is simple stuff...
An LLC is more work, but, if you can take advantage of the opportunities, an LLC may be better financially.
Again.... Talk with your accountant... one that specializes in small businesses.

I assume the company that's giving him the contract wants him to be an LLC to avoid problems with 1099 contractors being considered "employees" and being forced to provide OT, benefits, etc or risk violations of employment law regarding "contractors" doing the same work as "employees"..?? Not sure on this..

Good luck.

[Beiruty]

Last contract I had to go corp owner, who collected like $20k to write me a`check each 2 weeks (1099), the client wanted me not to be treated like an employee. Ths contract is asking for c2c to be protected from taxes liability and insurance liability to his other clients.

[Beiruty]

Roy and Al,

I am being pushed to the the LLC done by Monday. I know that I need to:
1) File a Certificate of formation with State of Texas. Can be don online and pay a fee, $150
2) Get an EIN and select the business Entities classifications.
3) It seems my case would be as close as Single Member LLC, see here: http://ww.irs.ustreas.govw/businesses/s ... 25,00.html" onclick="window.open(this.href);return false;
However, should Elected to be treated “disregarded entity” or again as corp when filing Form 8832?

A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.

Let us call my LLC, DVArt Engineering Solutions, LLC. Can this entity employ the owner (myself) as Employee? Or do I report the business income as I do with 1099. I am really confused. Mr IRS makes your head spin faster than the CERN accelerator.
From http://ww.irs.ustreas.govw/businesses/s ... 25,00.html" onclick="window.open(this.href);return false;
I do understand, if I am running a SMLLC, I can do my business and pay ET quarterly and at the end of the year file a 1040C (like I do with 1099) and Self Employment tax and report profit/loss form the LLC business .

Am I correct?

[RoyGBiv]

Regarding entity selection on 8832...
I don't know you or your tax situation... so.. I can only tell you what I would do under a general set of circumstances..

1. Typically you want to avoid being taxed twice, so, selecting the option that allows you to pass all the earnings to your personal 1040 is the lower-tax choice.. There are two paths to accomplish this...

First...
2. In the case of a SMLLC, that would be to elect "Corporation" on form 8832
3. Then elect to file as a Subchapter S... Form 2553
http://www.irs.gov/pub/irs-pdf/f2553.pdf" onclick="window.open(this.href);return false;
(you really need to talk with an accountant about this to be certain... it's been 6 years since I had to deal with this paperwork... something may have changed... Please do not take any action without professional advice)

Or....
2. Elect "disregarded" on form 8832...

Here is a decent discussion...
http://www.entrepreneur.com/management/ ... 78996.html" onclick="window.open(this.href);return false;

One possible solution, according to Kennedy, is to set up an LLC, and then elect to have the LLC taxed as if it were a Subchapter S corporation. The IRS allows you to do this by filing IRS Forms 8832 (to elect to have your LLC taxed as a corporation) and 2553 (to elect Subchapter S status), and you'll probably also have to alert your state tax authorities so they don't get confused. But be careful: As the ancient mariners used to say on their maps when things got a little imprecise, "Here be demons." When deciding whether to form an LLC or Subchapter S corporation for any small business, talk to your accountant first, and keep your life as simple as possible.

As for employment... It depends...... If you elect "corporation" and Sub-S, then your LLC can pay you just like any other employee... I believe (not certain) that if you choose "disregarded", then you lose this option... Again.. talk to an accountant.. not a CHL holder..

If you choose the Sub-S path, there's another potential tax advantage.. it is possible (check with your accountant) to have $50,000 in LLC Sub-S income but only pay yourself $35,000 in salary... The $15K difference would still pass to your 1040 and get taxed, but you MAY be able to avoid some of the self employment and unemployment taxes on the difference between the two numbers... The pros/cons are too difficult to explain here... You really need to discuss with your accountant when you have time..

Here's a good discussion of this...
http://www.drdebit.com/images/Florida_L ... S_Corp.pdf" onclick="window.open(this.href);return false;

Sorry I can't be more specific... I just don't know anything about you or your situation and it's been a while since I had to work through these issues..

I think you should be able to set up your LLC today and take a few weeks before filing the 8832... No? Use that time to talk with an accountant before going further...

[The Annoyed Man]

Sales tax needs to be collected and paid to the state from the first penny of taxable sales. Franchise tax is assessed when total revenue exceeds $1M in a year.

Two COMPLETELY different taxes.
Sales tax is a tax on your customers. Franchise tax is a tax on your company.

I am also not a CPA so check with yours for the details as they pertain to you exact situation.

Thanks for the clarification. You live and you learn.

[Beiruty]

The simplest way to do it is as follows:
1) FIle LLC with Texas.
2) Get an EIC even though I many not be
needed for SMLLC and for Federal Taxes.
3) File 8832 and selected disregarded entity. (IRS would be treating me as IC with 1099 income) with sole owner.
4) Have a Bank account for the LLC.
Income of the LLC goes to the LLC bank account
Business expenses paid from the LLC account.
I got a check biweekly from the LLC account.
I pay estimated TAX quarterly under my SSN.
5) By next April, Report Business income (minus expenses) on 1040C and pay Self Employment Taxes on the total balance.

True, I will paying more self-employment tax, but is it worth it to go through the S corportation? Also, as a green card holder, I may not be eligible to claim S Corp.

NOTE: LLC is not considered a taxable entity for IRS!, the members pay taxes on the net income generated.

If this sound like a ridiculous plan, someone let me know.

[Trinitite]

1. Typically you want to avoid being taxed twice, so, selecting the option that allows you to pass all the earnings to your personal 1040 is the lower-tax choice..

It's not that simple. It's true that dividends are taxed twice, once at the corporate level and once at the individual level. However, wages are taxed at least four times. Right off the top of my head, I can think of the corporate half of social security, other corporate payroll taxes, the individual's half of social security, and individual income tax. To muddy the waters even more, individuals may pay a lower FIT rate on dividends than earned income.

It's almost like the government is trying to discourage any economic recovery.

[sjfcontrol]

Let us call my LLC, DVArt Engineering Solutions, LLC. Can this entity employ the owner (myself) as Employee? Or do I report the business income as I do with 1099. I am really confused. Mr IRS makes your head spin faster than the CERN accelerator.
From http://ww.irs.ustreas.govw/businesses/s ... 25,00.html" onclick="window.open(this.href);return false;
I do understand, if I am running a SMLLC, I can do my business and pay ET quarterly and at the end of the year file a 1040C (like I do with 1099) and Self Employment tax and report profit/loss form the LLC business .

Am I correct?

Beiruty -- I strongly suggest you NOT put "Engineering" or any other form of the word in your corporate name. If you do, the state of Texas will soon contact you wanting to see your Professional Engineering License, or know who your Professional Engineer is. Then, unless you ARE a Professional Engineer, or employ one, you're gonna have some 'splanen to do. Don't ask me how I know this.

[Beiruty]

Let us call my LLC, DVArt Engineering Solutions, LLC. Can this entity employ the owner (myself) as Employee? Or do I report the business income as I do with 1099. I am really confused. Mr IRS makes your head spin faster than the CERN accelerator.
From http://ww.irs.ustreas.govw/businesses/s ... 25,00.html" onclick="window.open(this.href);return false;
I do understand, if I am running a SMLLC, I can do my business and pay ET quarterly and at the end of the year file a 1040C (like I do with 1099) and Self Employment tax and report profit/loss form the LLC business .

Am I correct?

Beiruty -- I strongly suggest you NOT put "Engineering" or any other form of the word in your corporate name. If you do, the state of Texas will soon contact you wanting to see your Professional Engineering License, or know who your Professional Engineer is. Then, unless you ARE a Professional Engineer, or employ one, you're gonna have some 'splanen to do. Don't ask me how I know this.

Good point and thanks for letting me know. I did not file yet and most likely I will do tomorrow. How about:
DVArt Solutions, LLC
Which refers to " Design Verification (the Art of) Solutions. Engineering is not Art for sure. However, you need to be very Creative Engineer to be highly distinguished.

[Beiruty]

1) LLC filed with State of TX.
2) EID issue by the IRS
3) Will be opening a new Business Account in less than 2 hrs