Tax for The Independent

[Charpress]

I guess another issue, since the decision to go independent has not been made yet, is whether to go independent as a Schedule C filer or go ahead and do an LLC and do all the contracting that way.

I would be inclined to just do it all.

 

[arnguy]

You also have the option of forming an "S Corporation" rather than a "C Corporation."

 

[Charpress]

I mean 1040 Schedule C, profits from individually owned business.

 

[SportsNut]

I mean 1040 Schedule C, profits from individually owned business.

Another consideration when thinking through whether to stay sole proprietor or use an entity, (Corp or LLC), is that filers of Schedule C's (sole prop), especially those will higher incomes, have a higher incident for selection for audit... Of course there are magic ratios for deductions, and exceeding one of more of the limits by percentage on a deduction will automatically throw you hat into the ring for fan mail from the IRS.

So whenever the decision is close, and a fair amount of business income is involved, I say ENTITY all the way. For a small agent or agency, I think that LLC is the logical choice. You can elect to have the LLC taxed as an S-Corp and the savings on the self employment taxes should be about 10K per year.

When your net income begins to exceed 250K, then it is time to consider using dual entities... Maybe having a C Corp in addition to the LLC... The C Corp could be paid certain fees for mgmt, then deductible as expenses to the LLC... Then the net income from the C Corp can be used to provide certain benefits to it shareholders that have greater deductibility than that of an LLC, or S Corp. In other words, the C Corp would have enough mgmt fees paid into it to have enough of a net income to pay all of your own employee benefits, health insurance, reimbursement plans, auto expenses, etc... A little more paperwork but likely another 5K or more in tax savings...

As was mentioned in an earlier post about a Keough being available only for sole proprietor... as a S corp or LLC one could pay into a SEP-IRA, simplified employee pension... which has the same limits as a Keough Plan... up to 25% of net income, not to exceed 46K in 08, and 49K in 09.... so the bennies are there for a small operator, corp, LLC or sole prop... just that LLC, S and C Corp expand the use of these bennies and deductions.

 

[Franz Kafka]

Another consideration when thinking through whether to stay sole proprietor or use an entity, (Corp or LLC), is that filers of Schedule C's (sole prop), especially those will higher incomes, have a higher incident for selection for audit... Of course there are magic ratios for deductions, and exceeding one of more of the limits by percentage on a deduction will automatically throw you hat into the ring for fan mail from the IRS.

So whenever the decision is close, and a fair amount of business income is involved, I say ENTITY all the way. For a small agent or agency, I think that LLC is the logical choice. You can elect to have the LLC taxed as an S-Corp and the savings on the self employment taxes should be about 10K per year.

When your net income begins to exceed 250K, then it is time to consider using dual entities... Maybe having a C Corp in addition to the LLC... The C Corp could be paid certain fees for mgmt, then deductible as expenses to the LLC... Then the net income from the C Corp can be used to provide certain benefits to it shareholders that have greater deductibility than that of an LLC, or S Corp. In other words, the C Corp would have enough mgmt fees paid into it to have enough of a net income to pay all of your own employee benefits, health insurance, reimbursement plans, auto expenses, etc... A little more paperwork but likely another 5K or more in tax savings...

As was mentioned in an earlier post about a Keough being available only for sole proprietor... as a S corp or LLC one could pay into a SEP-IRA, simplified employee pension... which has the same limits as a Keough Plan... up to 25% of net income, not to exceed 46K in 08, and 49K in 09.... so the bennies are there for a small operator, corp, LLC or sole prop... just that LLC, S and C Corp expand the use of these bennies and deductions.

Thanks for sharing guys. I know LLC won't cover personal assets for professionals like doctors and lawyers. I have a feeling an insurance agent/financial advisor is not covered, either.

 

[SportsNut]

I've been thinking about going independent and have a tax question. My career shop pays 1/2 of my FICA although I'm a statutory employee...

I know LLC won't cover personal assets for professionals like doctors and lawyers. I have a feeling an insurance agent/financial advisor is not covered, either.

Well Franz, it seems that you hhave now changed the subject... everythiung up to this point in the thread was about taxes, and how to structure for the best tax posture... Now you shift gears and say that the LLC doesn't address your personal liability...

Let me clue you in here, for a shareholder of any entity, (Corp or LLC) who is hands on practitioner, there is NO business structure which protects your personal assets... Problem being is that you personally are the one performing the task, be it medicine or insurance, or whatever, and if the task goes array then the claimant will come after the party who perpetrated the loss. For this exposure you have INSURANCE...

Now there are some things that can be done to minimize exposure, when speaking of personal liability... When forming an LLC, make sure you have multiple members, and avoid the single member LLC trap. It is easier to pierce the single member LLC and obtain a charging order against the assets of such an entity, than a multiple member LLC.

The other thing that can be done to provide greater asset protection is have multiple entities, and segregate assets so that all your eggs aren't in one basket. Another common one is for any personal real estate owned to be in the name of your spouse, assuming he or she is in a low liability line of work. Otherwise, you guessed it, have the real estate owned by a multi-member LLC. This way even if a claimant were to obtain a judgment against you personally, they couldn't execute against the multi-member LLC that owns the property(s). They coudl only do so if the props were sold and a distribution was made to you personally, then that is fair game.

The problem with asset protection is that it takes TIME... and there is a monetary cost to managing all the entities. Once you have your first big lawsuit, then you will see the advantage to the time and money spent. There are plenty of ways to set it up so tha you are reasonably protected under most events that are likely to occur. But back to the original premise, use an entity for greater tax savings.

 

[Charpress]

Ah, so you want to protect assets from potential creditors?

[Charpress corners Kafka at Christmas party] "Let me tell you about the advantages of annuities...."

 

[SportsNut]

Ah, so you want to protect assets from potential creditors?

[Charpress corners Kafka at Christmas party] "Let me tell you about the advantages of annuities...."

Can I Deed my house to one of those annuity thingies...?

Charpress's assertion of asset protection of annuities is not universal and differ greatly from state to state. States like FL give 100% exemptions while others give scant protections... so before you slam someones $$$ into an annuity contract and tout the creditor firewall, be sure you know your states rules...

Many states only protect annuitization pymts and only if the annuitant is ill, disabled or over a certain age... Just know your rules...

 

[Charpress]

[Charpress corners SportsNut at Christmas party] "Let me tell you about the advantages of annuities..."

"A-B-C. A-Always, B-Be, C-Closing. Always be closing, always be closing." -Blake, Glengarry Glen Ross