I want to start a company where I'll be the sole 100% owner. Obviously if I make a profit, I'll be paying myself on a monthly basis and at the end of the year after all expenses have been paid and some money left in the bank for operating expenses, I want to be able to take the remaining money home.
What legal structure should I choose? I am aware that an LLC will let me do this but I'll be a single-member LLC, where I probably won't be subjected to the same personal asset protection that a multi-member LLC is subjected to. I think that I can protect myself by choosing to be taxed as a C-Corp, but I think that defeats the purpose of forming an LLC.
I am a little confused about this. Please leave your info in your answer as I am looking to start this in January.
I would need much more information before I could answer this question accurately, but you may benefit from forming as an S-Corp. It would allow you to have only one level of tax (like an LLC) and also avoid certain employment taxes on distributions above a FMV salary for your services, and provide liability protection.
The liability protection, however, for any single owner entity is less than many people believe. You will still have personal liability for your own actions or omissions. Frequently, a good umbrella policy is your best protection against potential liability. Feel free to call me at 610.660.5585 if you wish to discuss.
Well your hunch is probably correct. Over the years, despite statutes to the contrary, courts are much more willing to find individual owners subject to personal liability particularly if the owner does not maintain good, separate records and formalities. However, in your case it seem that an S-corporation would be more appropriate as courts are generally more comfortable with corporation since they have been around for a hundred years and if the corporate formalities are followed rarely are the shareholders responsible for the debts of the enterprise. On this some courts are starting to do is to impute much higher partnership like duties on LLC members amongst each other, while this is not universal the trend is moving on and should you ever take on another member you may owe him/her more legal obligations that you are ready to assume.
Also, you mentioned that you anticipated paying yourself a salary. One advantage of an s-corp is that you can make a year end distribution to yourself (which has to be reasonable under IRS standards--generally the amount equal to your yearly wage) which is taxed not as ordinary income, but at the capital gains tax rate which can result in substantial savings.
Since it does not sound like you are going to be seeking venture or other equity participation to get your entity off the ground you don't have to work about the limited number of shareholders (100 max) or multiple classes of stock. For these an a number of other reasons I would seriously consider an S-corporation.
Attorney Ezold gives sound advice. An LLC is an excellent legal to isolate the liabilities generated by a business (or other risky assets as for example investment real estate). However, it does not offer full protection from lawsuits. A plaintiff may attempt to hold you personally responsible by theories as negligence or gross negligence. As Mr. Ezold does, I always recommend my clients and prospects to get an umbrella policy that offers as much protection as possible
Depending on your total personal net worth, the scope of your business and the estimated revenues, you may want to consider combining the LLC with a legal tool that is specifically set up for asset protection purposes: a Family Limited Partnership that is filed in a state with strong charging order rules such as AZ or NV. This setup is tax neutral.
You need to seek advice with a business planning / asset protection attorney and an insurance broker.
Happy holidays and good luck with your new business venture.
An LLC will be disregarded for tax purposes for the most part and will report taxes as a sole prop. An S-corp will be respected, but you still must pay yourself a reasonable salary, which will be subject to payroll taxes. It must be REASONABLE unless it represents all of the remaining income from the business. In other words, you can only underpay yourself if the business lacks the ability to pay more. What you cannot do is take little or no salary, and pass 100k to yourself as business income free and clear of payroll taxes.
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As the other posters have indicated, there are benefits to utilizing a single-member LLC and to utilizing an S-Corp. The main difference is how you pay yourself. With a single-member LLC there is only one level of tax and you need good bookkeeping to track your pay. However, just as with an S-Corp., you can use a payroll service with an LLC to pay yourself a reasonable salary. Payroll taxes are about 15.4%. With the S-Corp., you only pay the employer portion of the self-employment tax, so you save 7% on the salary portion, but you do need to make sure you are paying a "reasonable salary." With an S-Corp. or a properly structured LLC, you can take a deduction for "reasonable salary" out of the business, which reduces your net profit, and hence your taxable business income. You should really consult an accountant on this, and if you feel you need additional help beyond that, have a tax/corporate attorney set up the structure for you. In New Jersey, an LLC needs to have an Operating Agreement. As noted, errors and omissions insurance and other products can supplement your Limited Liability protection. Regardless of the structure you use, as a small business, if you have a 100% owned entity, you will personally be a target for any lawsuit from creditors, vendors, or others who are harmed by the business. You should really consult a corporate lawyer as the level of protection you need varies based on what kind of business you have and what industry you are in.
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