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My question is regarding choosing the type of...

Resolved • Response time 4 minutes

5 Dec 2012

My question is regarding choosing the type of corporate entity that best suits our situation... My wife runs a small event planning business, last year's revenue was about $40K, next year will probably be similar. It is a sole proprietorship currently. I am not an employee of the business, but listed as a general partner on the tax license. My job as a software engineer is not super secure at the moment, so we'd like to have her company structured in a way that if I lose my job we can get group health insurance for her company (private plans are not an option for various reasons). Currently, insurance companies that offer group plans, need to see the company incorporated as an LLC/Corp for a number of months and have at least 2 employees. From what I gather, employees of a Corp need to be paid "reasonable" wages and this is an area of scrutiny for the IRS so people aren't abusing the lower tax rates of dividends. I imagine that health insurance companies would also want to see that I'm actually being paid by the entity if I'm going to be considered for group plan membership. So what I'm wondering is what it looks like to pay two employees reasonable salaries in a company that doesn't make enough money to do so. And then, how do the different tax scenarios of the entity types possibly prevent this from even being a financially good idea. Or, is there a structure that would make this financially beneficial since there isn't much revenue and if the entity was taxed, after salary and benefits deducted, there will be hardly any corporate tax. But some of these scenarios raise little questions that I don't know about, like what does it look like if there isn't cash to pay salaries at some point. Other considerations... The company currently pays a handful of part time employees as contractors. Revenues come from contracted services and commissions from vendor affiliates. No plans for outside investment. Possibilities of future employee ownership probably isn't worth swaying the new structure chosen, but easy addition of future w2 employees with benefits is. Thanks for feedback, J
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5 Dec 2012

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Business Lawyer's response
5 Dec 2012
Alex J. Esq.
Alex J. Esq.
Managing Attorney
Hello. My name is XXXX. X would be happy to answer your question. Does the business currently generate sufficient amount of revenue for both you and your wife to be paid reasonable wages/salaries and then to also cover payroll taxes and other business overhead?
5 Dec 2012
Customer reply
5 Dec 2012
I guess that depends on the limits of "reasonable wages". Like I said, last year grossed about $40K. So I don't know how to answer that since I don't know how to define reasonable wages.
5 Dec 2012
Customer reply
5 Dec 2012
Sorry, forgot to mention that I think overhead was around $10K. And I don't know much about payroll taxes or what the rate would be at those salary levels. Thanks for you help!
5 Dec 2012
Business Lawyer's response
5 Dec 2012
Alex J. Esq.
Alex J. Esq.
Managing Attorney
Thank you for your follow up. Unfortunately, you will not be able to have payroll for you and your wife that exceeds your revenue and you would also need to pay about 15% of the gross wages in payroll tax, not to mention your overhead. Basically, you would need to draw a reasonable salary for both yourself and your wife for at least minimal wage amount which is currently is $8 per hour. I have represented several business clients in the past, who had exactly the same main objective when incorporating their business or making it an LLC is to be able to obtain a group medical insurance and my experience had been that when is comes to smaller businesses (less than 15 employees), the insurance companies would scrutinize and review the business much more thoroughly, before issuing a group insurance policy. It might make more sense to seek an alternative way of obtaining medical insurance coverage for you and your spouse, as it might simply be very difficult to run a business and show loss at the end of the year (due to the payroll and overhead) for more than a year or two, before IRS will start questioning and potentially might audit your company. I wish you and your family the best of luck!
5 Dec 2012
Customer reply
5 Dec 2012
I'd still like to incorporate in some fashion so as to limit liability. Taking the employee status shenanigans out of the equation, would you recommend a LLC (flow through tax), LLC (S-Corp tax), or S-Corp? Are there reasons for/against me being a member/shareholder of the entity?
5 Dec 2012
Business Lawyer's response
5 Dec 2012
Alex J. Esq.
Alex J. Esq.
Managing Attorney
Thank you for your follow up. It is always a good idea to incorporate or form an LLC in order to shield your wife or any other principals of the company from potential personal liability. Generally, for a small business such as the one you are describing, it might be generally a good idea to form LLC and elect (S-Corp tax) and also you can be listed as one of the two managing members for the purposes of having authority and control over the LLC and since LLC would shied all its members from personal liability, there is not much of a downside if you elect to list yourself as a managing member. Of course each individual situation is unique and requires a thorough review and analysis by a local business / tax attorney or an experienced CPA and I would suggest that you do consult with your local business attorney or CPA before making the ultimate decision as to what form of the business entity to form for your business. I wish you and your family the best of luck and a Happy and Healthy Holiday Season!
5 Dec 2012
Business Lawyer's response
5 Dec 2012
Alex J. Esq.
Alex J. Esq.
Managing Attorney
Do you have any related follow up questions?
5 Dec 2012
Customer reply
5 Dec 2012
Is the main difference between doing a single vs two member llc how taxes are filed... Schedule C for single verses K-1 for multi-member? But how does that work when the 2 members are filing jointly? Also, in the case of doing a 2 member LLC, do we do formal distributions to just my wife and have her be the only one doing self-employment taxes? Or are the quarterly taxes done jointly also so it doesn't matter who the paycheck is written to?
5 Dec 2012
Business Lawyer's response
5 Dec 2012
Alex J. Esq.
Alex J. Esq.
Managing Attorney
Thank you for your follow up. In US, corporate income is often subject to double-taxation such as both the company and the shareholders must pay income tax. Unlike the corporations, LLC however, only have their income taxed on the owner's level. This is why, on the company level, no difference exists between single- and multi-member LLCs when it comes to income taxation. On the other hand, on the personal level, a married couple may see a difference related to the taxation of their personal income. If a married couple files separate tax returns and only one spouse owns the LLC, the profits from the LLC may put that individual into a higher tax bracket, resulting in a higher tax rate. However, if a married couple files a joint tax return under a single-member LLC or if both spouses are members of the LLC, this would not happen.
5 Dec 2012
Customer reply
5 Dec 2012
So how do I go about deciding the best route?
5 Dec 2012
Business Lawyer's response
6 Dec 2012
Alex J. Esq.
Alex J. Esq.
Thank you for your follow up. The only prudent way to determine the best route for you to take is to consult with your local business law / tax attorney or an experienced CPA and during this consultation, your local professional can review your entire personal and business financial situation, your past income and tax returns and also examine the objective and priorities that you have related to creation of the business entity for your business and then this local professional can provide you with a specific advise, as legal professionals, such as myself of Pearl.com can only provide customers with general legal answers, based on the current principles of law, but not with any type of specific legal or tax advice, which can only be obtained during an in-person consultation and upon a full review of your situation by your local legal / tax professional. I wish you and your family the best of luck and Happy and Healthy Holiday Season!
Alex J. Esq.
Alex J. Esq.
Managing Attorney
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6 Dec 2012
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