best entity type for Entertainment business

[jmc]

When choosing an LLC as a best entity type for Entertainment business, what factors can be the major advantages compared to an S Corporation? LLC's disadvantages in California include annual Gross Receipts Fee & Social Security Tax for active members(Federally).

[S T]

Gross Receipts

Because of California, what do you anticipate Gross Receipts to be?

Sandy

[erchess]

For Tax Purposes

an LLC is a disregarded entity for Federal and every State I know of. One of its options is to be taxed as an S Corp and another is to be taxed as a C Corp and if there is only one owner it can elect to be taxed as a Sole Proprietorship.

In my opinion the owner(s) would be well advised to sit down with a tax lawyer in the area where the business will operate and discuss entity and other issues.

[S T]

Legal Issues

A sit down with an attorney would be good, and Erchess is correct, a LLC can or an S Corp still could have some liability issues passed through to the Member or Shareholder

An example is one of my clients that formed an S Corporation, husband and wife as the primary shareholders, and they had to personally guarantee their lease at a Commercial Site. They sold the business including the assignment of lease, but the landlord said no to the new tenant(the buyer), (my tax payer still had to guarantee the lease) the buyer filed bankruptcy 1.5 years later, and had unpaid lease amounts for about 8 months. My taxpayer was obligated to pay the lease. It was really ugly!

What is the purpose for liability exposure that your client wants to form either an LLC or a S Corp?


Sandy

[DTS]

Entity

I could be very wrong here, but I have yet to see how there is any liability protection for a one or two man operation that a good liability insurance policy couldn't handle. For several members or shareholders, yes.

I'm a native Californian and I find it sad that this state just can't seem to be very friendly to businesses here. It's so irritating. Give the politicians some more time and they will put the final nail in the business coffin by making entity fees more outrageous. Probably, prohibitive.

[Bees Knees]

In Minnesota, it wouldn’t hurt to be an LLC, because there is no annual fee or administrative issues involved. The LLC status in Minnesota is simply a peace of mind thing.

In California however, where there is extra fees for being an LLC, it is a waste of money.

Entertainers do not need LLC or S corp status for liability protection. Neither an LLC nor a corporation are going to shield the owner from his or her own malpractice, which is probably 99% of all liability issues an entertainer is going to face.

Tell your client to buy liability insurance if he or she is concerned about liability protection.

[Nashville]

Careful in TN

an LLC is a disregarded entity for Federal and every State I know of.

Now you know differently. And since you're only 40 miles from Tennessee this is something you SHOULD know.

An LLC is taxable in Tennessee as a corporation, even if disregarded for Federal purposes. Because there is no personal income tax here, the corporate tax structure is not very business-friendly. The very large businesses that have moved here (such as the Saturn cars under GM and Volkswagon in Chattanooga) have done so only because of huge concessions in TN corporate tax.

So if an LLC forms in this state, and is treated under Federal as a proprietorship, the income will be subject to TN corporate tax at 6.5% PLUS a Franchise tax on net worth.

Interesting history behind this. When the LLC craze started in late '80s Tennessee was going to treat this as personal income not subject to any state tax at all. At the time, two very large Memphis corporations, Federal Express and Holiday Inn, applied to change their status to LLCs simply for no other reason than to bail out of paying TN corporate tax.

Needless to say, a sudden fast-track bill was adopted by the legislature to tax LLCs. The bill grew wings and was passed in two days. Amazing how fast politicians can get things done when it affects THEM.

The no-income-tax has been attractive for Tennessee and has attracted retirees and other solid job workforce people. But it contorts other revenue sources and makes them cumbersome to administer.

[dsi]

As already pointed out, this really is a legal issue that needs the advice of an attorney. There may be some tax issues involved, but here in CA and other states as well the liability issues do exist. For example, there is this thing called a "charging order". I am not knowledgable enough to explain it, but it does exist, and it has much to do about the choice of entity.

[JohnH]

I'll jump in here with a story about liabliity insurance from my experience, for what it's worth. About 30 years ago a manufacturing company I was working for was named in a class action lawsuit. A couple of days after we notified our liability insurance company of the lawsuit, they sent us a registered letter pointing out that the plantiff was seeking punitive damages, and advising us that punitive damages were not covered in our liability policy. They wanted to be sure we knew that if the plantiff won any punitive damages, we were on our own.

It's a long story, but we eventually paid several thousand dollars to be severed from the lawsuit (again no thanks to our insurance company, by the way). But the owner of the company told me he would have lost lots of sleep over the punitivie damages isssue had he not been incorporated. At least he was pretty sure that even if he lost his business, his home and personal assets were not on the line.

I know this was a very rare and unusual situation, but it did happen. So I've remained a little more skittish than many when it comes to doing business with the public. With rare exceptions, my general approach is that if it isn't cost effective to operate as a corp or an LLC (regardless of the state) that's a strong indication that going into any business may need to be re-thought. I take the view that the added tax and administrative costs of operating as a corp or an LLC are just another form of insurance; another layer of protection for the owner(s). If the business model won't support those legitimate costs, then maybe it has a fatal flaw.

[Nashville]

Personal Liability

Neither an LLC nor a corporation are going to shield the owner from his or her own malpractice, which is probably 99% of all liability issues an entertainer is going to face. Tell your client to buy liability insurance if he or she is concerned about liability protection.

Liability protection is for torts arising from such things as heavy equipment or whitewater rafting. I'm not aware of any state where corporate protection absolves personal services from liabilities created by lack of adequate performance.

Still, some states allow a "P.C." or "Professional Corporation." I don't know what this does or what kind of entity this might be. Commonly occurs with Lawyers, Doctors, CPAs, Architects, etc. the very people that would contend with personal service issues. I believe it may shield the entity from claims OTHER than malpractice, and also it may take advantage of a distinction between ordinary negligence and gross negligence in some states.

Also don't know how it applies in California, which is what the original post is concerned with.

[BOB W]

I have a question about Tenn. I had a client move from NY to TN. He does some side work for the US Gov't and gets a 1099 from them. He files a schedule C for this part time work. Is that subject to the entity tax of 6.5%????????????

[DTS]

...For example, there is this thing called a "charging order".

Dave,

I Googled this and found several very interesting articles on "charging order". Sure glad you mentioned this.

D

[Nashville]

He's Off the Hook

I have a question about Tenn. I had a client move from NY to TN. He does some side work for the US Gov't and gets a 1099 from them. He files a schedule C for this part time work. Is that subject to the entity tax of 6.5%????????????

Bob, Sch C is tax-free as far as TN state taxes is concerned. A proprietorship doesn't pay the corporate tax. If he starts an LLC, it will be taxed at 6.5%.

[erchess]

Thank You For the Correction

Now you know differently. And since you're only 40 miles from Tennessee this is something you SHOULD know.

An LLC is taxable in Tennessee as a corporation, even if disregarded for Federal purposes. Because there is no personal income tax here, the corporate tax structure is not very business-friendly. The very large businesses that have moved here (such as the Saturn cars under GM and Volkswagon in Chattanooga) have done so only because of huge concessions in TN corporate tax.

So if an LLC forms in this state, and is treated under Federal as a proprietorship, the income will be subject to TN corporate tax at 6.5% PLUS a Franchise tax on net worth.

Interesting history behind this. When the LLC craze started in late '80s Tennessee was going to treat this as personal income not subject to any state tax at all. At the time, two very large Memphis corporations, Federal Express and Holiday Inn, applied to change their status to LLCs simply for no other reason than to bail out of paying TN corporate tax.

Needless to say, a sudden fast-track bill was adopted by the legislature to tax LLCs. The bill grew wings and was passed in two days. Amazing how fast politicians can get things done when it affects THEM.

The no-income-tax has been attractive for Tennessee and has attracted retirees and other solid job workforce people. But it contorts other revenue sources and makes them cumbersome to administer.

This is good to know. I don't think I have ever done a return where TN was involved. What happens when a NC based S Corp does business in TN? That hasn't happened to me yet but it could happen in the future.

[Nashville]

Foreign Corporation

Erchess, a NC corporation doing business in TN is subject to the 6.5% tax rate and files as a "foreign" corporation. The measurement of TN taxation is a mixture of the per cent of equipment/real estate located in TN, Sales in TN, and Payroll in TN. A percentage is assigned based on these three values.

The Federal Return Net Worth and Taxable Income are then multiplied by this apportionment percentage to arrive at the Tennessee corporate tax.

TN does not recognize an S Corp because if they passed thru corporate income onto the shareholders, the shareholders would have no income tax in this state. A corporation files the same return whether it is an S corp or a C corp.