Forming your own LLC and doing contract work

[BigRichard]

I put in my resignation late last week. It was suggested today I might be able to do some contract work for them remotely which has me intrigued. Who on CP has formed their own LLC and done some contract work. Any suggestions on how to handle it? Would you go some other route?

[BigRedChief]

Originally Posted by kccrow

Sorry Chief... hit post too soon... Your primary liability is going to be errors and ommissions and breach of contract.

I don’t make errors. All my contracts have an out clause that either party can terminate the contract at any time with 2 weeks notice. I don’t do “delivery” contracts. Be at the mercy or whim of some VP whether you finished the agreed upon work? Now, you got lawyers involved and there goes all your profit. **** that noise.

[Buehler445]

Originally Posted by kccrow

Yes, you can elect S-Corp status as a single-member LLC. You must file Form 8832 to elect to have the entity classified as an association taxable as a corporation, then you must file Form 2553 to elect to be treated as an S-Corp.

It will be important for the OP to determine how he wants to do things and seek out specific guidance. If you intend to declare as an S-Corp, then it is important that you 1) Pay yourself a salary and 2) that salary be justifiable and reasonable in the eyes of the IRS, else you would be in for a ride.

I wasn't overly clear in my original post about too much because I'm not offering this as a service to a client and would rather you seek out your own CPA to help you, but ...

If you elect S-Corp status as an LLC you do get some benefits...

1) You are paying yourself a reasonable salary and as such only have to pay OASDI/Medicare on that salary. The salary is a deductible expense of the business and reduces "net income."

2) As such, you won't pay OASDI/Medicare on ALL income as you would in the case of an LLC or any other pass-through classification.

3) As well, since salary is taken from income, you will not pay income taxes on that salary. This reduces your income tax burden.

4) Consult a tax professional on the exact in's and out's of the 20% deduction associated with having a pass-through entity. This is outlined in the Tax Cuts and Jobs Act, Provision 11011 Section 199A. I'm not abreast on it overall but I know there are limitations on income and wages paid.

5) There is different tax paperwork and overall paperwork to file with the IRS if you elect to be treated as a corporation and then an S-Corp. A sit-down with an Accountant to go over everything is paramount for you (not a ****ing Lawyer).

RE: 4. The limitations regarding wage start at I think 400K if he filed MFJ if he runs into that as he’s described it, I’m in the wrong business. But there is different treatment for specified service trades that I know nothing about. I’m guessing he should be good to go on the QBI deduction. Which would help. But I think a schedule C would provide him the same benefits. Without looking st his stuff of course.

RE: 3. Yes the reasonable wage reduces the net income of the business. But you have to pay tax on the W-2 wages. Since the income is passthrough, it’s going to hit the same tax bracket as the wages, so the only net effect on tax liability is the deduction of the employer portion of SS/Medicare. Where you’d achieve tax relief is any earnings taken as owner draws. Those are non-taxable. But you have to have earnings over and above the reasonable wage and have positive basis in the company. There is a point at which the IRS will deem the draws excessive but I don’t know where that is.

[BigRichard]

I was working through the online setup for forming one of these and the site I am doing it with states there are other licenses needed in your state to be compliant which isn't
part of forming the LLC. Anyone know what those might be?

[ChiefGator]

Yeah, I would suggest just doing a 1099, and pay an attorney to look over your contracts and have a good indemnification clause in there. Unless of course they REQUIRE you to be a company to do contract work.. which is more common in some fields. Or they require you to have business insurance, etc..

[kccrow]

Originally Posted by BigRichard

I was working through the online setup for forming one of these and the site I am doing it with states there are other licenses needed in your state to be compliant which isn't
part of forming the LLC. Anyone know what those might be?

What is it you're doing precisely and in what state?

Most states have laws for Professional companies but they seldom apply to IT. Usually, the fields they cover are Accounting, Law, Architects, Engineers, Health Care (Doctor, Chiropractor, Surgeon, Dentist, Psychologist, etc), Animal Health Care (Vets, Animal Chiros, etc), and Real Estate Agencies. You wouldn't set it up as a professional service company. In that case, there are specific state licenses you must hold to set such a company up. For instance, an accountant wishing to open a professional corporation would need to hold a CPA or CMA license in that state. A lawyer would have to had passed that state's bar exam, etc.

[BigRichard]

Originally Posted by kccrow

What is it you're doing precisely and in what state?

Most states have laws for Professional companies but they seldom apply to IT. Usually, the fields they cover are Accounting, Law, Architects, Engineers, Health Care (Doctor, Chiropractor, Surgeon, Dentist, Psychologist, etc), Animal Health Care (Vets, Animal Chiros, etc), and Real Estate Agencies. You wouldn't set it up as a professional service company. In that case, there are specific state licenses you must hold to set such a company up. For instance, an accountant wishing to open a professional corporation would need to hold a CPA or CMA license in that state. A lawyer would have to had passed that state's bar exam, etc.

Interesting, they just said there was a couple of licenses you would need to apply for in your state. I tried to do a "chat" with the state license office last week but I don't think they have their website up and functional. I will have to try and call them this week to see if there is anything else I might need to do.

[Rain Man]

Originally Posted by Buehler445

...

RE: 3. Yes the reasonable wage reduces the net income of the business. But you have to pay tax on the W-2 wages. Since the income is passthrough, it’s going to hit the same tax bracket as the wages, so the only net effect on tax liability is the deduction of the employer portion of SS/Medicare. Where you’d achieve tax relief is any earnings taken as owner draws. Those are non-taxable. But you have to have earnings over and above the reasonable wage and have positive basis in the company. There is a point at which the IRS will deem the draws excessive but I don’t know where that is.

Owner draws are still taxable on income, but just not for self-employment taxes. I kind of view that as a neutral thing, though, because self-employment taxes are mostly for social security. So if you take out income as an owner's draw, it lowers the eventual social security payment you'll get.

Now, the Medicare tax is a different story. From what I can tell, it does a person no benefit to pay more into Medicare, right?

[Buehler445]

Originally Posted by Rain Man

Owner draws are still taxable on income, but just not for self-employment taxes. I kind of view that as a neutral thing, though, because self-employment taxes are mostly for social security. So if you take out income as an owner's draw, it lowers the eventual social security payment you'll get.

Now, the Medicare tax is a different story. From what I can tell, it does a person no benefit to pay more into Medicare, right?

My understanding is the only way it’s taxable is if it is a guaranteed payment. I don’t know what the rules are regarding guaranteed vs owner draws, but I think it has to be an expense paid by the entity.

Regular owner draws just credit cash and debit basis in stock. Stays on the balance sheet and won’t hit the income statement.

[Buehler445]

http://loopholelewy.com/loopholelewy...-money-out.htm

This article calls them non-dividend distributons. But as long as there is basis it’s tax free. I didn’t know about the LTCG business. I thought you just couldn’t do it with negative basis.

[Rain Man]

Originally Posted by Buehler445

My understanding is the only way it’s taxable is if it is a guaranteed payment. I don’t know what the rules are regarding guaranteed vs owner draws, but I think it has to be an expense paid by the entity.

Regular owner draws just credit cash and debit basis in stock. Stays on the balance sheet and won’t hit the income statement.

Yeah, it just hits the balance sheet, but (at least in my case) the money I take out is money that I paid taxes on earlier as a Schedule K passthrough to my personal taxes. I'm just taking money out that I've already paid (income) taxes on.

Of course, now the rules have changed, so I think passthrough income is taxed at a lower rate, so that's an advantage. (Yay, Trump!)

[Buehler445]

Originally Posted by Rain Man

Yeah, it just hits the balance sheet, but (at least in my case) the money I take out is money that I paid taxes on earlier as a Schedule K passthrough to my personal taxes. I'm just taking money out that I've already paid (income) taxes on.

Of course, now the rules have changed, so I think passthrough income is taxed at a lower rate, so that's an advantage. (Yay, Trump!)

Oh hell. I see what you’re saying. Sorry for the confusion. You’re right. It’s not deductible, so that way income passes through.

[Amnorix]

Originally Posted by scho63

LLC's are normally formed if the line of work you are going to be doing exposes you to a variety of lawsuits and liabilities such as construction, driving a vehicle, medical or anything else where you are a target for lawsuits so you can protect your assets.

If you are just a CONTRACT worker and doing tech work, game development, book keeping, project management you do NOT need an LLC and an S or C Corp is just fine.

What type of work will you be doing?

While asset protection is a primary reason for performing the work through an entity, whether it is an LLC or an S Corp., there can be other reasons as well, primarily tax benefits via expensing costs or whatever. Best to consult with an accountant on this.

[Amnorix]

Originally Posted by fan4ever

Can I piggy bank on this thread?

I've never been sued and there are no pending lawsuits now. I recently acquired LLC status for my business. Since I've done this with no actions against my business in the works, does this protect me against work I've done in the past; before attaining an LLC?

No. The work was performed directly and not through the entity, so if there was any liability for the work performed, you would be sued in your individual capacity, rather than having your company sued.

[Amnorix]

Originally Posted by kccrow

What is it you're doing precisely and in what state?

Most states have laws for Professional companies but they seldom apply to IT. Usually, the fields they cover are Accounting, Law, Architects, Engineers, Health Care (Doctor, Chiropractor, Surgeon, Dentist, Psychologist, etc), Animal Health Care (Vets, Animal Chiros, etc), and Real Estate Agencies. You wouldn't set it up as a professional service company. In that case, there are specific state licenses you must hold to set such a company up. For instance, an accountant wishing to open a professional corporation would need to hold a CPA or CMA license in that state. A lawyer would have to had passed that state's bar exam, etc.

Yes this. And there's no other separate requirement to form an entity as a general matter. There are some rules around S Corp ownership (non-citizen or something), but I haven't looked at that in years so the rules may have changed.

Beyond that weirdness, however, if you're a US citizen, and forming an entity which is NOT a professional corporation, there should not be any special requirements in connection with the formation.

[Amnorix]

Originally Posted by BigRichard

Interesting, they just said there was a couple of licenses you would need to apply for in your state. I tried to do a "chat" with the state license office last week but I don't think they have their website up and functional. I will have to try and call them this week to see if there is anything else I might need to do.

Not accurate, unless your state is bizarre. I've formed entities in at least 20 states over the years. There can be modest variations from state to state, but no "licenses" unless, as Kccrow said, you're forming a professional corporation.