LLC, S Corp or Sole Proprietorship

My strategy is based entirely on my extensive tax background. It is what I worked in for over 20 years.

You can retain income in a c corporation and yes, you have to watch for earnings building up. However, there were favorable laws toward dividends in the past. A way of avoiding any problems with the earnings being built up is to have a sound program in place in the records that support reinvestment to the business such as asset acquistion.

An S corporation is very limited toward the potential benefits that can be paid to the "sole" owner. These are things that I was sheltering income. The double taxation is only a small problem which very few will see in this industry. If they do, they need a better tax person. I worked on much larger business operations. If it is a cash rich business, then an S corporation is one to examine.

I have never been one to follow the way of the world. I look and examine each situation to the best result.

 

This is a very sound strategy for someone in a high income bracket. But how many independent O/O could even consider this let alone have the knowledge to pull it off without paying someone to advise them?

Would be interested in your thoughts on in what scenario an LLC would be viable. We looked long and hard at LLC vs. S-Corp. It was hard for me to accept that so many people in our business are doing an LLC but could not find any benefit. Higher state fees (IL based), higher prep fees and no tax advantage. Only thing I saw was loss protection vs. partnership but even that is not a given these days.

 

Maybe someday I can be talked into looking into it. I live in the same state as you, so I know the problems. You might be surprised at the income level involved. The main key is the lower SE tax.

Initially, I would say most have been misled about LLC and asset protection.

Yes, the way I did things required more knowledge and for most a tax consultant and closer attention.

 

Illinois Corporate tax rate of 9.5% is mafia, it depends on what state you Incorporated in and how the umbrella protection coverage.

 

Not much difference from personal rate of 5%.

 

Depends on the gross taxation, buy saving the 4.5% my calculation is a savings of over $10,125.00 just for business taxes. Then calculate property taxes for Illinois, Florida is a one shot state and you pay taxes for trucks and trailers once per purchase. 6% is the current sales tax.

Also the savings in personal income taxes, Florida has no income tax for employees. Savings of 5% that anyone as a Florida resident would not pay, this all adds up.

Moving a business to Florida saved over 25k last year alone, it may be the armpit for trucking but a tax haven it could be if negotiated properly.

 

I would not operate any other way than under a corporate umbrella. The annual costs are minimal. Each state is somewhat different in their fee structure, but I have a minimum charge of $100/year for the franchise and excise taxes and $20/year to file an annual report. Any of these fees may be deducted from your federal taxes, so I don't see that it really costs much more, if any, than operating as a sole proprietorship.

There are some asset protections when you operate under a corporate structure, but one of the primary advantages are with taxes, at least for the time being. With a proprietorship, all net income is subject to social security and/or self employment taxes along with all the other taxes we are subjected to as individuals. If you pay yourself a small salary and any income as dividends, then you only pay income taxes on the net. With a corporation you can set up your own 401k or other type of retirement program and save more than as an individual and an IRA.

One important feature a corporation has is the separation of personal and business assets. You don't pay capital gains on income from the corporation. You pay income taxes on income. Capital gains taxes are paid after you sell stock or other qualifying investments after holding on to them for a minimum amount of time. I believe that it is still 6 months. That is not anything that most small business owners need to worry about.

There isn't that much extra paperwork involved when you own a corporation. I think that it is worth the extra expense and time.

 

Each state is a little different. Min in IL for a corp is going to be $100 and $250 for an LLC. Other little extra fees depending on structure.

I would never Inc. based on asset protection. As an individual operating under a corp you can still do everything 100% right and a third year law student (that is when they cover this stuff) could pierce the corporate veil.

It is a tax strategy. And that was why I was asking about the LLC. I could not find a reason why someone (typical O/O) would consider an LLC.

 

My understanding is that a single-owner LLC is treated exactly the same as a sole proprietorship for tax purposes by the IRS. Its only advantage is as a vehicle for distributing the profits of a partnership.

 

That is my understanding as well. My understanding is that you do have some additional vehicles available for retirement but these are available in other structures as well.