Are S corps advantages destroyed by some state laws?

[jfoxcpacfp]

@Slav4ikMD - At the income level of your personal business, I see no reason for the s-corp. You won't get any more protection than you do with the PLLC and you are paying to have a separate corporate tax return prepared and you have to file payroll tax returns for only 1 employee (yourself). With the PLLC, you will file a Schedule C which is included with your 1040 and you'll have only distributions to yourself. Plain check rather than paycheck with taxes withheld, etc. You'll make quarterly estimated payments to fed and, if applicable, state and local.

[jfoxcpacfp]

docnews wrote:

Johanna Turner wrote:

 

The reason to choose a corporation or LLC has more to do with liability protection than saving taxes. This is an often-misunderstood point. For you to be a sole proprietor may not be as big a risk today since you are just starting out and likely have more debt than assets, but it will be a future concern. Your malpractice policy will cover claims on your work as a professional but not if you kill a child crossing the street on your way to work. And not if an employee makes an error that causes loss or harm to someone while he/she is on the clock. The way to cover these and other risks are with adequate insurance, including a sizable umbrella policy, along with a business structure that shields your business from personal assets.

 

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Isn’t the liability protection overblown? I’m setting up an umbrella insurance policy for personal protection and in my state it is unheard of for there to be a malpractice claim higher than the limit. This s corp accounting/fee/taxes costs a few thousand a year which makes it a questionable expensive “insurance policy” on the rare likelihood that I would be sued successfully for greater than my umbrella insurance limit AND that my state would allow my s corp income to remain out of the grabs of the lawyers. Plus these pass-through entities pass the money right through to your personal bank accounts that have no extra protection, correct?

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It depends on your specific facts and circumstances, as you alluded to ("...in my state..."). Your knowledge is not the norm; you'd be surprised how many professionals are uninformed about umbrella insurance coverage, for example. For someone like you who is concerned about the cost of filing the tax forms, I'd say just go to a SM-PLLC. Should cut down on your filing costs and simplify the process as you would be an owner, not an employee. Of course, if you have other employees, you still have the filing requirements. But if you are HNW, I would expect to be sued for malpractice if I advised you operate as a sole proprietorship and you were sued yourself.

Since I don't know what state you live in, I can't comment as to the opportunity for lawyers there to pierce the corporate veil, but if you follow protocol for your corp/LLC, I don't see how that could happen. I am not sure what you mean by "Plus these pass-through entities pass the money right through to your personal bank accounts that have no extra protection, correct?" The pass-through entity doesn't do anything with your money. The shareholder (corp) or the member (PLLC) decides what to do with the money. Once it is out of the business then it is, of course, a personal asset and not shielded by the corp/PLLC. If you are simply a sole proprietor, there is no distinction between you and your business, however, which would be scary to me. Quite frankly, I have an umbrella policy, professional liability insurance, and other policies and I wouldn't consider doing business as a sole proprietor.

[jfoxcpacfp]

docnews wrote:

Johanna Turner wrote:

 

The reason to choose a corporation or LLC has more to do with liability protection than saving taxes. This is an often-misunderstood point. For you to be a sole proprietor may not be as big a risk today since you are just starting out and likely have more debt than assets, but it will be a future concern. Your malpractice policy will cover claims on your work as a professional but not if you kill a child crossing the street on your way to work. And not if an employee makes an error that causes loss or harm to someone while he/she is on the clock. The way to cover these and other risks are with adequate insurance, including a sizable umbrella policy, along with a business structure that shields your business from personal assets.

 

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Isn’t the liability protection overblown? I’m setting up an umbrella insurance policy for personal protection and in my state it is unheard of for there to be a malpractice claim higher than the limit. This s corp accounting/fee/taxes costs a few thousand a year which makes it a questionable expensive “insurance policy” on the rare likelihood that I would be sued successfully for greater than my umbrella insurance limit AND that my state would allow my s corp income to remain out of the grabs of the lawyers. Plus these pass-through entities pass the money right through to your personal bank accounts that have no extra protection, correct?

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@docnews: I responded to your response at around 2pm CST and it is no longer here, so I'll try to recreate what I posted. If a dup appears, please forgive me...

Few (very few) professionals are as informed as you seem to be. Umbrella insurance coverage is an inexpensive and wonderful product. You don't provide your state, but I don't doubt your experience has occurred in some areal. However, my advice is meant for the general readership. And as long as you maintain proper corporate/LLC protocol, I don't know how your state could allow your income to be "grabbed" by lawyers. As far as I know, the evidence of prior court cases overwhelming suggests otherwise.

Insurance is meant to cover the "rare likelihood" of an improbable but highly costly occurrence. It is a wager between you and your insurer. I personally have professional liability/malpractice coverage, an umbrella policy, and other policies but I wouldn't dream of running either of my businesses without the shield of corporate/LLC protection between my business and personal assets. If I were to advise you to set up as a sole proprietorship based upon your reasoning, I would expect to be find myself in court were you to be sued. I am positive that your attorney would suggest the same.

Since you are concerned with the compliance costs of your S-corporation, I suggest you consider a SM-PLLC. If you have no employees, you will almost certainly simplify your record-keeping, tax filing, and paperwork requirements at perhaps (dexpending on your location) no additional tax burden. This may bring down the cost of working with your current professional, depending upon the other services you are getting.

Not sure what this means: "Plus these pass-through entities pass the money right through to your personal bank accounts that have no extra protection, correct?" The entity does not pass the money through; the member (LLC) or the shareholder (Corp) makes that decision. Naturally, once an asset moves from the business ownership to personal ownership, it is no longer protected by the business. Money in your bank account is protected up to $250K per person per institution if you were referring to FDIC coverage. But I'm not sure how that fits into the discussion - perhaps you could clarify? Sorry if I'm being obtuse - not intentional - and hope this helps in some way.

[jfoxcpacfp]

docnews wrote:

Johanna Turner wrote:

Not sure what this means: “Plus these pass-through entities pass the money right through to your personal bank accounts that have no extra protection, correct?” The entity does not pass the money through; the member (LLC) or the shareholder (Corp) makes that decision. Naturally, once an asset moves from the business ownership to personal ownership, it is no longer protected by the business. But I’m not sure how that fits into the discussion – perhaps you could clarify? 

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An LLC or Corp does not hold the money, correct? Soon after the corp or LLC gets the money, it would be passed on to me. So how does it protect the money from personal liability?

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@docnews, The LLC and/or Scorp can hold the $$ if you decide to keep it there. You may need it to purchase equipment in the future or to set aside for 401k contributions in the following year, for example. Another idea - if you want to buy a building to rent to the business, you can save $$ in your current LLC/S and then transfer to a 2nd LLC to hold the real estate when you have saved enough. The $$ does not automatically go to your personal account. I think you may be thinking of a PSC (Professional Service Corporation) which distributes profits before the close of each year.

[docnews]

Thanks so much Johanna Turner for being so persistent in trying to answer my question! (I too was having trouble posting but I think WCI fixed it now).

I still don't see a great benefit for an LLC or S corp to hold my money. If the entity holds some of the money, it will be better protected from lawsuits, but during that time I can't invest or spend it but I have to pay accounting costs for this temporary protection.

If the entity distributes the money regularly (often referred to as a "pass-through"), I potentially could see some tax savings if I lived in different state (TN law mentioned in first post) but I quickly forfeit my lawsuit protection.

Is this not correct?

Thanks again for your responses even with the difficulties of the new forum!

[Slav4ikMD]

Thanks Johanna, I will have to learn more about this.  I see what you are saying.  But given that my side business is likely to grow and W2 employed stuff may diminish a bit, I guess I will just keep things running as is for now.  It seems like with higher numbers for the 1099 income, it may start to make more sense.

Also my accountant said that with the way I do it, I am less likely to get audited, rather than with just taking significant deductions of the 1099 income - no idea if that is true.

[EnjoyIt]

Two big savings I see with S-corps

save in medicare tax, and allow for 1 corporate retreat a year.  Allows for you and your employees (you) to go on a business retreat to a destination and discuss business.

http://www.wsj.com/articles/SB10001424052748704131404575117661962497090

nothing like going to Vegas or Aspen for a week at 39.6% off

 

[jfoxcpacfp]

@EnjoyIt - That's a good article, but note that an LLC can pay for the same office retreat. In the beginning, at lower income levels (where @Slav4ikMD is now), an LLC may be better until biz is in the higher brackets. Then he needs to weigh the advantages and disadvantages. If you are paying $2k a year or more for tax prep, compliance, and payroll service and saving same on Medicare taxes, I'd recommend the LLC. It's very difficult to overcome the argument that your salary should be lower than similar providers in your area when the business depends on you to survive, so you're paying Medicare taxes on the bulk of the income, anyway. If he gets to, say, $600k revenues and has a PA working, then should be able to justify a salary that leaves some profits for distributions.

[jfoxcpacfp]

(deleted due to duplicate posts)

[EnjoyIt]

Johanna,

Thanks for the clarification.  Some other benefits I know of:

1) Paying for Healthcare expenses and Health insurance can only be done through a corporation.

2) Using the up to 300sqft at $5 per foot a month for simple home office deductions can only be done through a corporation.

3) Parking expenses at $255 a month only through corporations as well.

Am I being mislead?  Is the only benefit the medicare tax.

 

What about a defined benefit plan if interested in tax deferment above 53K in a 401K? Can that also be done as a sole proprietor?

[jfoxcpacfp]

EnjoyIt wrote:

Two big savings I see with S-corps

save in medicare tax, and allow for 1 corporate retreat a year.  Allows for you and your employees (you) to go on a business retreat to a destination and discuss business.

http://www.wsj.com/articles/SB10001424052748704131404575117661962497090

nothing like going to Vegas or Aspen for a week at 39.6% off

 

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That's a good article, but note that you can have the same office retreat (if you are so inclined) under an LLC. In the beginning, at lower income levels (where you are now), an LLC may be better until you are in the higher brackets. Then you need to weigh the advantages and disadvantages. If you are paying $2k a year or more for tax prep, compliance, and payroll service and saving same on Medicare taxes, and have no other employees, I'd recommend the LLC.

[jfoxcpacfp]

@docnews - you're welcome. I think you are making my argument. If the business doesn't have a lot of assets, then that is all that is exposed to loss in the event someone successfully sues the business. Yes, you can cover (probably) all with an umbrella policy, but an LLC is very cheap insurance in the event expectations do not equal reality. On the outside of your business, your umbrella policy can pick where liability insurance stops. I find myself in the position of arguing for the unlikely event of catastrophe, which I think our industry overthinks in many instances. Plus, odds are you'll never need that umbrella policy. However, I get paid for asking "what if?" - hope this helps.

 

@docnews - I did not address your question about living in a different state. If you moved to TN, you would have Franchise and Excise taxes on your business, which would NOT save you $. BUT, you would not be taxed on personal income and that is where the savings would come in. (Nevada, South Dakota, Washington, and Wyoming do not have any tax on corps.

[EnjoyIt]

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[EnjoyIt]

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[EnjoyIt]

Johanna Turner wrote:

@EnjoyIt – That’s a good article, but note that an LLC can pay for the same office retreat. In the beginning, at lower income levels (where @Slav4ikMD is now), an LLC may be better until biz is in the higher brackets. Then he needs to weigh the advantages and disadvantages. If you are paying $2k a year or more for tax prep, compliance, and payroll service and saving same on Medicare taxes, I’d recommend the LLC. It’s very difficult to overcome the argument that your salary should be lower than similar providers in your area when the business depends on you to survive, so you’re paying Medicare taxes on the bulk of the income, anyway. If he gets to, say, $600k revenues and has a PA working, then should be able to justify a salary that leaves some profits for distributions.

Johanna,

Thanks for the clarification.  Some other benefits I know of:

1) Paying for Healthcare expenses and Health insurance can only be done through a corporation.

2) Using the up to 300sqft at $5 per foot a month for simple home office deductions can only be done through a corporation.

3) Parking expenses at $255 a month only through corporations as well.

Am I being mislead?  Is the only benefit the medicare tax.

 

What about a defined benefit plan if interested in tax deferment above 53K in a 401K? Can that also be done as a sole proprietor?