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LLC. v INC.

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jamibo
LLC. v INC.
on Mar 12, 2007 at 11:48:27 pm

Hi Cows...

I find myself in a fortunate, but unexpected position this coming tax season. As a freelance producer/editor, I've been doing fine, but in 06 business blew up. My tax preparer set me up with a quarterly payment plan for 06 based on what I expected to do, but it was WAY OFF.... and now I'm writing a fat check to the taxman. Anyway, I've been told to incorporate as way to help out the tax issue, but a surf around that crazy world wide web has just brought up more questions.

So I'm wondering what any of you might recommend. I need to do something, as business shows no signs of slowing in 07, and I do hire people, crews, equipment, etc...

Suggestions are appreciated, as I know there are many cows out there in a similar position.

Thanks....

Jason
greydogfilms.com


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walter biscardi
Re: LLC. v INC.
on Mar 13, 2007 at 12:32:26 am

I've been an LLC since 1998, first as co-owner of another business and my own since 2001. LLC gives you many of the benefits of an S Corp, but it's less expensive and easier to set up than an S. Basically, the company does not get taxed at all, it's just your own personal taxes that get taken out.

You really want to talk to your tax adviser about S vs. LLC but I can tell you all the freelancers and small shop owners I know are LLC's.

Walter Biscardi, Jr.
http://www.biscardicreative.com
HD Editorial & Animation for Food Network's "Good Eats"
HD Editorial for "Assignment Earth"

"I reject your reality and substitute my own!" - Adam Savage, Mythbusters


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Tim Wilson
Re: LLC. v INC.
on Mar 13, 2007 at 12:50:58 am

We had a two-person company that was incorporated, because it offered tax advantges over LLC in Florida. They also cost the same amount to establish.

That's why you need to check with your tax adviser. :-)


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jamibo
Re: LLC. v INC.
on Mar 13, 2007 at 1:19:23 am

Thanks Fellas... I was hoping to hear from people like you. I just wanted to get a feel for what real people are actually doing. A tax person will give great advice, but you guys give experience.

I appreciate it.

Jason


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Rich Rubasch
Re: LLC. v INC.
on Mar 13, 2007 at 1:59:22 am

First go buy the book "Inc Yourself" it's on Amazon.

Another good reason to incorporate is that the paperwork between two corporations is the simplest if most of your clients are themselves, corporations. With an LLC, any work that you bill to a corporate client will require that corporation to issue you a 1099 form at the end of the year. Many corporations prefer to pay another corporation and not an LLC for this reason (there is cost involved in generating the 1099, and a paper trail)....if you are a corporation, the books are cleaner and your corporation is completely liable for paying the taxes....the corporation you bill holds no liability. Since most of my clients are corporations, they prefer this.

An LLC is a little simpler to establish, but being an S-Corp has proven to have advantages to my clients that they prefer.

There are also tax benefits to me as the owner and only shareholder that your accountant, and the book "Inc Yourself" will explain.

Rich Rubasch
Tilt Media Inc.


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Greg
Re: LLC. v INC.
by
on Mar 13, 2007 at 2:49:57 am

S corp here. Rich's comments are right on.


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walter biscardi
Re: LLC. v INC.
on Mar 13, 2007 at 3:15:10 am

[Rich Rubasch] "With an LLC, any work that you bill to a corporate client will require that corporation to issue you a 1099 form at the end of the year. Many corporations prefer to pay another corporation and not an LLC for this reason (there is cost involved in generating the 1099, and a paper trail)..."

That is completely incorrect information. There is zero need for a 1099 form from anyone if you are an LLC. As I noted earlier, I've been an LLC since 2001 and have not received or requested a 1099 from anyone.

1099's are ONLY for individuals and sole proprietors.

Walter Biscardi, Jr.
http://www.biscardicreative.com
HD Editorial & Animation for Food Network's "Good Eats"
HD Editorial for "Assignment Earth"

"I reject your reality and substitute my own!" - Adam Savage, Mythbusters


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jamibo
Re: LLC. v INC.
on Mar 13, 2007 at 3:21:28 am

Well I'm glad I asked the question, because no matter where I look or who I ask, I get differnt opinions. Even tax pros don't agree. It's obvious that I must do one of the two. Being that I am a sole proprietor, with no current employees, paying quarterly taxes and collecting 1099's along the way, is there any specific tax advantage to one over the other?

greydogfilms.com


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Fantastic Plastic Entertainment, Inc.
Re: LLC. v INC.
on Mar 13, 2007 at 3:28:42 pm

There are going to be different advantages to each... I would talk to at least a CPA in YOUR state and get his or her opinion.

We are an S-Corp and it has always worked out pretty well. There is the occasional disadvantage though, one that you are already familiar with. As was pointed out, an S-Corp pays no income taxes itself, but the tax burden falls on the shareholders of the company. Ergo, one goal is to make sure you make as little profit as possible (I jokingly refer to ourselves as a "non-profit organization). You do that at the end of the year by basically getting rid of cash... buy needed equipment, salary bonuses for employees, or pay dividends to shareholders (which hopefully primarily will be you). We made the mistake in 2005 of "accidently" having a buttload of profit (and I'm still not sure how it happened), so I had to personally write Uncle Sam a very VERY painful check. Our general manager who takes care of all our accounting is efforting to make sure that doesn't happen again.

Another thing to note... some people can't decide whether to incorporate as an S-Corp or a "regular" full corporation. If you incorporate as an S-Corp, you can convert it to a regular corp later... but you can't go the other way around.

Todd


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Tim Kolb
Re: LLC. v INC.
on Mar 13, 2007 at 5:27:07 pm

Keep in mind that legal shelter is part of what most would consider a big part of the advantages of incorporating. The crew burns down a grocery store during a shoot...the corporation gets sued. The owner is a separate entity.

This status is fairly well tested and standardized for corporations, but a few years ago there was some question among legal pros as to how "limited liability" an LLC would actually be when exposed to litigation.

...just another little sub plot to put in the mixture.




TimK,
Director,
Kolb Productions,

Creative Cow Host,
Author/Trainer
http://www.focalpress.com
http://www.classondemand.net


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Steve Boultbee
Re: LLC. v INC.
on Mar 15, 2007 at 4:21:46 am

[Fantastic Plastic Entertainment, Inc.] "You do that at the end of the year by basically getting rid of cash... buy needed equipment, salary bonuses for employees, or pay dividends to shareholders (which hopefully primarily will be you)."

Paying out cash to the owners of an S corp doesn't have any affect on profits. It's simply a return of the income that the owners were already taxed on (or will be, if it's current year profits). Hence, it's a non-taxable distribution. The other stuff will work, though.


[Fantastic Plastic Entertainment, Inc.] "Another thing to note... some people can't decide whether to incorporate as an S-Corp or a "regular" full corporation. If you incorporate as an S-Corp, you can convert it to a regular corp later... but you can't go the other way around."

This statement is incorrect... you can convert from a regular "C" corp to an S corp. It carries with it some caveats regarding the types and amounts of income that you can earn as an S corp, but it can be done. However, converting from an S corp to a C corp is much easier. For a single owner running a business, there's almost no reason to incorporate as a C corp. If your business expands and you need to bring in many investors, a C corp might be the way to go (an S corp has limitations on the number of shareholders, as well as the type of shareholder). However, C corps suffer from double taxation of income - net income is taxed once at the entity level and then again to the shareholders as a dividend when they take a distribution of that profit in cash or property. S corps pass all their income through to the shareholders, so it's taxed only once (except if the state has an S corp tax - see my example of CA below).


To the original poster, if you don't like writing a big check to Uncle Sam at tax time, you need to update your accountant throughout the year as to your expected income so that he/she can update the projections of your tax liability. It sounds like you didn't do that.

The decision of LLC or S corp isn't an easy one. You should really speak to a CPA and/or an attorney that can look at your situation in detail and recommend a course of action based on the laws of your state. I know from your profile that you're not in California, but I am, so I'll give you an example of some of the differences in CA. Your state may have similar provisions. California imposes an LLC fee based on the gross receipts for the year. This means that even if you sustain a net loss, you can still get hit with a fairly substantial bill. A California S corp pays an entity level tax of 1.5% to the state based on net income. This difference in entity level taxes/fees is just one thing to take into account along with the differences in legal protection and other requirements (such as the required corporate records and so on).

Disclaimer: This post is not intended to be tax advice. See a professional who is familiar with the laws of your state.



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jamibo
Re: LLC. v INC.
on Mar 15, 2007 at 5:01:19 am

Wow... The most concise and nearly understandable (my ignorance, not a slam) post yet! I do appreciate that knowledge. I actually did update my tax advisor, but it was September and she recommended buying tons of equipment. I didn't really need any and thought better about buying stuff I wouldn't necessarily use or need. I max out my SEP and I can knock it down a bit, but not much.

I will be discussing this with a CPA, but I appreciate the input. I just have this feeling that there's not right or wrong answer.... and that, along with my ignorant understanding of tax laws and bureaucratic jargon, makes me very uneasy.

But the Cows always offer insight... and I totally appreciate it!

Jason

greydogfilms.com


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Rich Rubasch
Re: LLC. v INC.
on Mar 13, 2007 at 11:41:11 pm

Perhaps different here in Wisconsin....1099 is REQUIRED for LLC's in Wisconsin.

Rich


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Bruce Bennett in Madison, WI
Re: LLC. v INC.
on Mar 23, 2007 at 6:12:49 am

My company is an LLC filed as an S-Corp. and has an EIN/Tax ID. Because of these "components" I don't need 1099s from my clients. But...last year I hired a subcontractor who was a LLC but did not have an EIN/Tax ID. My accountant said I needed to send her a 1099 because of that combo.

Bruce Bennett,
Bennett Marketing & Media Production, LLC - http://www.bmmp.com


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