Type of Business

[tulsa lawn guy]

The remaining profit if any can then be distributed in whole, not subject to social security and medicare taxes.

I understand that, but is that remaining income taxed at personal income tax rates or at dividend/distribution tax rates?? That's the big question...

[Aproct]

Tulsa lawn guy,

The remaining distribution will go against your cost basis, just like the previous example. As Sodbuster indicated, you have to take a reasonable salary which I accidentlly omitted on my previous email.

Anyway, as for previous question, the 65,000 would be taxed at capital gain rate depending on the "holding period" of the actual company. What I mean by that is if you started the company at the beginning of the year with and then decided to take the 75,000 out at the end of the year, you will be charged short term capital gains on the remaining 65,000. But if the period of the business is longer than a year, than you will be charged at the long term rate of 15%, that is if they don't change. This is an election year and things always change......

The only other way to get around the capital gain tax is by setting up a note to you as the shareholder with specific payment terms and interest. The note can be no longer than a year to the shareholder. THis would then go on the books of the corp as a notes receivable, short term. Thhis would at least defer the tax, but it must have intentions that the shareholder is going to and will pay the loan back or otherwise the loan will be considered a return of capital.

[tulsa lawn guy]

That clears it up...

Thanks again for the great information Andy.

[Aproct]

Not a problem....

[The landscaper]

Is it possible to run a partnership through an LLC. It seems like and LLC is most logical for me to get into.

[Aproct]

Why would you want to do that????I hope you like paying for tax return prep.

[The landscaper]

What do you mean by that?

[Aproct]

Landscaper,

Because if you are doing the partnership properly, you are preparing a 1065 Partnership tax return for Federal purposes. Then the partnership kicks out a K-1 to the partners and then you would have to take that K-1 and prepare a Schedule C on your personal return for the LLC, then take the schedule C and included that on the 1040. Boy if I was the IRS I would be throwing all kinds of red flags at your return wanting to know what you are hiding.

Next thing you will be asking me what about my Camine Islands account and my off shore business.

Dude just stick to the basics.....

[CCLS]

Originally posted by tulsa lawn guy
The only difference between a regular corporation (C corp.) and an S corporation is simply the way they’re taxed. In a C corporation your net profits are taxed at the corporate level, and then, at times you have the possibility of double taxation. In an S corporation all the business profits flow through to the shareholder(s) and are taxed at their personal income rates.




Erich,
Please correct me if I’m wrong… It is my understanding that with an S corporation, you can pay yourself in one of two ways. 1. Take a salary as an employee of the corporation. 2. Receive distributions (dividends) from the profit of the corporation. On the money that you take out as salary, you have to pay the 15.3% self employment tax (12.4% SS, 2.9% Medicare). However, on the distributions you do not have to pay this 15.3% tax. This would make one want to pay themselves nothing in salary and take it all out in the form of distributions. Sounds good to me, but I’ve been told that the IRS has a bit of a problem with this. The solution… pay yourself a minimal salary and take the rest out as distributions. So, on a $100,000 take a $25,000 salary and take $75,000 in the form of distributions. Done this way you only have to pay the 15.3% tax on the $25,000.

Question… Generally your employer would pay 7.65% (half) and you would pay 7.65% (half). So the question is… would your employer, which is your S corp, be able to deduct the half of the taxes that it pays for you as a business expense??

You are absolutely correct. There are many benefits of an S Corp. If you are planning on starting a Corporation, you need to run your business like one. I would suggest hiring an accountant to create your monthly P & L statement. This way all you have to do is double check their work.


Mike,

For your size I would recommend staying a sole proprietor. When you reach the level of $35,000.00 a year in gross sales, I would then recommend you starting an S Corporation. This will help you tremendously tax wise. Keep in mind that even if you are Incorporated, you can still be sued if you are a share holder.

[mikeslawnservice]

Thanks CCLS.

[The landscaper]

Thanks guys, this was a great thread. I have learned so much reading through this.