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Discussion Starter · #1 ·
Our cpa suggested that we dissolve our LLC and Incorporate our business. I just want to know everyone else's input on this suggestion. What are the strong points and weak points on both? She had suggested going INC due to tax purposes and that we would be paying less on tax. I checked out legalzoom and got some information there.

Corporations offer personal liability protection, tax savings, and increased opportunities for raising capital. Corporations are also required to perform certain formalities such as holding annual meetings and keeping detailed corporate records (minutes). With LegalZoom you can choose to incorporate as either a C or S corporation.

Limited Liability Companies (LLCs) offer the same personal liability protection as a corporation, but with fewer of the corporate formalities. They typically are not required to hold formal meetings or keep detailed corporate minutes. LLCs also offer great tax flexibility. Members can choose to be taxed as either a traditional corporation or as a "pass-through" entity.
 

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What were his reasons for you to switch?

I think I would listen to an attorney as these are legal entities. But, I am curious why he suggested you to change.
 

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Discussion Starter · #3 ·
Our cpa and attorney are husband and wives. They pretty much just said, we'll be saving tax dollars in the long run. That was the only reason. I've asked around though, many have suggested to just stick with LLC because it has less restrictions.
 

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Our cpa and attorney are husband and wives. They pretty much just said, we'll be saving tax dollars in the long run. That was the only reason. I've asked around though, many have suggested to just stick with LLC because it has less restrictions.

Where the people that suggest you stay with the LLC lawyers/accountants?

I would suggest you get a new lawyer/accountant because its obvious you don't really trust their opinion.
 

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Discussion Starter · #6 ·
Attorney/CPA suggested INC. Some of my buddies who own businesses suggested LLC. I am getting other opinions. Just thought id try here also and see what other people's experiences are. Thanks!
 

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A quick recap of the three types of entities:

LLC

First, there are no tax advantages (or disadvantages) to forming an LLC. In fact, forming an LLC won't change a thing for Federal income tax purposes. Single-owner LLCs are taxed just like sole proprietorships, and multiple-owner LLCs are taxed just like partnerships.

You should, however, be aware that forming an LLC might subject your business to additional state taxes. Certain states (California for instance) subject LLCs to "franchise taxes" in addition to a typical income tax.

S-Corp

S-Corporations have the ability to provide some tax savings as a result of the fact that profits from an S-Corp are not subject to Self-Employment Tax. However, before you're allowed to distribute any profits, you are required to pay any owner-employees a "reasonable salary." This salary will be subject to social security and Medicare taxes (which total the same amount as the Self-Employment Tax). As such, the tax savings only take effect once the business has a pretty sizable income.

Also, you should be aware that S-corporations are significantly more complicated from a tax and legal standpoint than LLCs. So if you form an S-corp, know that you're going to be spending a great many more billable hours with your accountant/attorney.

C-Corp

Unlike most other business structures, C-corporations are taxable entities. This means that the corporation itself is taxed on its income (as opposed to other structures which simply pass the income along to the owner(s), who are then taxed on it).

If you don't plan to distribute all of the profits from your business, you might benefit from forming a C-corp and utilizing a strategy known as "income splitting." The idea is to split the business's income so that part of it is taxable to the corporation and part of it is taxable to the corporation's owner(s), thus putting them each in a lower tax bracket than they'd be in if either one was earning all of the income.

The big disadvantage to C-corp taxation is that distributions of profits (known as "dividends") are subject to double taxation. In other words, the corporation is taxed once on its income, and then the shareholders are taxed upon any dividends they receive.

Also, like S-corporations, C-corporations are more complicated from an accounting/tax/legal standpoint than sole proprietorships, partnerships, or LLCs. As such, C-corp owners tend to incur fairly high legal and accounting costs.
 

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Discussion Starter · #8 ·
A quick recap of the three types of entities:

LLC

First, there are no tax advantages (or disadvantages) to forming an LLC. In fact, forming an LLC won't change a thing for Federal income tax purposes. Single-owner LLCs are taxed just like sole proprietorships, and multiple-owner LLCs are taxed just like partnerships.

You should, however, be aware that forming an LLC might subject your business to additional state taxes. Certain states (California for instance) subject LLCs to "franchise taxes" in addition to a typical income tax.

S-Corp

S-Corporations have the ability to provide some tax savings as a result of the fact that profits from an S-Corp are not subject to Self-Employment Tax. However, before you're allowed to distribute any profits, you are required to pay any owner-employees a "reasonable salary." This salary will be subject to social security and Medicare taxes (which total the same amount as the Self-Employment Tax). As such, the tax savings only take effect once the business has a pretty sizable income.

Also, you should be aware that S-corporations are significantly more complicated from a tax and legal standpoint than LLCs. So if you form an S-corp, know that you're going to be spending a great many more billable hours with your accountant/attorney.

C-Corp

Unlike most other business structures, C-corporations are taxable entities. This means that the corporation itself is taxed on its income (as opposed to other structures which simply pass the income along to the owner(s), who are then taxed on it).

If you don't plan to distribute all of the profits from your business, you might benefit from forming a C-corp and utilizing a strategy known as "income splitting." The idea is to split the business's income so that part of it is taxable to the corporation and part of it is taxable to the corporation's owner(s), thus putting them each in a lower tax bracket than they'd be in if either one was earning all of the income.

The big disadvantage to C-corp taxation is that distributions of profits (known as "dividends") are subject to double taxation. In other words, the corporation is taxed once on its income, and then the shareholders are taxed upon any dividends they receive.

Also, like S-corporations, C-corporations are more complicated from an accounting/tax/legal standpoint than sole proprietorships, partnerships, or LLCs. As such, C-corp owners tend to incur fairly high legal and accounting costs.
nicely done !:thumbsup:
 

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With a corporation, you can be double taxed. The corp pays tax and then you pay tax (on income given to you by the corp).

If you do work by yourself, there is very little liability protection on either. To remain "sue free" personally, you would need to do no work directly for the homeowner. Otherwise, they can sue the company and the individuals who do the work.

Dean
 

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You may want to check with your licensing board. For expample here in CA you can only be a coporation. If you're in a state where it does not matter, if you form a corp you will have to issue stock and have annual meetings. If its just you and you form a single member LLC. I had the folks over at MyLLC help me get set up. They are very friendly and informative.. the number ot their office is 888 886 9552
 

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personnally, it sounds to me like they are trying to "create/drum up" busy work for themselves

there is certainly no tax saving incentive in dissolving the llc for the inc, perhaps making bigger sep ira contributions would be a plus, but if you're not making or going to be making max contributions or larger that what you're currently contributing, I don't see the benefit
 

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How big is your company? I've always been told that if your company is growing, getting big, then it's time to switch to a corporation. Corporation takes more paper work, you have to be more organized, but your cpa is right about the tax savings. You can sell stock to, I believe you have to be an S-Corp for that.
 

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How are there taxes savings for a corporation over an LLC? An LLC can elect to be taxed as a sole proprietor/partnership or as a corporation.

From the IRS:

The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.
An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.” Form 8832 is also filed to change the LLC’s classification.




http://www.irs.gov/businesses/small/article/0,,id=98277,00.html
 

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all good advice. the key is the s-corp vs c-corp election as to how your entity is taxed. i was advised by my accountant to go llc and file the s-corp election. under this structure, you can take advantage of the sep contributions, the 'reasonable salary', and the shelter of personal assests as the s-corp creates that corporate 'veil' between you and your business. obviously, regulations differ state to state, so you do probably need to consult with a local cpa and bring up all these points and see how your state regards each entity.
 

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I went to a class last month taught by an attorney, he spent the whole time talking about sole proprietors, llc's, s-corps and c-corps. As I recall, you can save on taxes under certain conditions with a corporation. I don't know how the nuts and bolts of it works, that is just what I heard.

But if your accountant says you will save on taxes with a corporation, then you probably will. I doubt a CPA will lie and set up a conspiracy that way so they can make money off doing the work for you.
 

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You may want to check with your licensing board. For expample here in CA you can only be a coporation. If you're in a state where it does not matter, if you form a corp you will have to issue stock and have annual meetings. If its just you and you form a single member LLC. I had the folks over at MyLLC help me get set up. They are very friendly and informative.. the number ot their office is 888 886 9552

Correct. No LLC's for contractors in CA, only Corporations are allowed.
 

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three significant differences between and llc and s-corp: 1) llc is easier to form and dissolve; 2) differnt terms; and 3) operationally llc and s-corp are treated differently by some states / clients, both good and bad. that last one you need to research carefully state-to-state.

the long-term disadvantage of the llc is it cannot convert to something other than itself from a tax planning perspective. an s-corp has a one-time option to become a c-corp, which is a legal right to postpone taxes to sometime in the future. you do this when the s-corp comes into the money but caveat is the c-corp causes double taxes at that time in the future when you try to get your money out. first tax is to the c-corp, and the second is to the shareholder. its a tax planning strategy that thinks very big and long-term.
 
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