Entity Choice

[S T]

And yet another question from a tax client on entity choice

T/P emails and states, I am opening a consulting business, in this case, health benefits consulting , client used to work for a very large Health Insurance Provider as a CFO, also has a CPA degree (non practicing), huge layoff in the Company, so t/p received a very nice severance package. Has had time to review the markets and is thinking about a consulting business in this field. Consulting would be primarily at the Corporate Levels, not individuals.

So of course t/p has received feedback from acquaintances that t/p should open a consulting business and t/p should be a LLC or a S Corp and then is asking for tax advice. Given this t/p's past history, I would suspect that t/p will earn $100K-$250K or more as a consultant.

What would you advise? Remain a sole proprietorship, LLC or S Corp?

Schedule C is always a first thought, My thoughts are LLC is easier to operate (State of Ohio), however, there might be a tax savings on SE tax if a S corp. Also advising that if S Corp, t/p would need to implement additional accounting, and a "reasonable" salary from the S Corp.

Also addressing the Liability issue, would be to contact an attorney, but on the surface point out that neither entity will protect t/p from liability issues if it is mal-practice or an issue dealing directly as a result of the member or shareholder negligence, etc. T/p would still need inusrance to cover not only the entity but also the t/p personally.

I know this has been discussed on other threads or posts, but just wondered if someone had something to add.

Thanks,

Sandy

[Corduroy Frog]

My two cents

Sandy, this guy is best defined as favoring an S corp. Whether he wants to be an LLC or not would be a legal question, but if he chooses an LLC he should either do nothing and be a proprietorship, or check the box as an S corp.

If he remains a proprietorship, his earnings will be over the SS limit, so the self-employment tax would max out except for 2.9% medicare.

There have been changes back and forth over the last several years, and the C corp is more attractive now that dividends are capped at 15%. If that provision expires, the C corp will not be attractive at all. If the earnings are going to be over $100K, the low C corp rates will apply only to the first $50K, then they graduate.

The double taxation is tolerable only when you HAVE to leave money in the C corp. This occurs on cash investment-intensive operations. Huge cash outlays for buildings or equipment, receivables, or inventory are not deductible, hence a corporation can have a profit and not have cash available for the taxpayer to pay. Those situations lend well to a C Corp. A corporation doing road paving, for example with $3 million investment in equipment.

A consultant has no investment in these sort of things, hence no requirement to leave the cash in the corporation. Take the income and pay the tax only ONE time, and use the available cash to pass through to the shareholder to pay it with.

[ChEAr$]

Considering

an S corp.........

Unless there are some other assets justifying a reasonable return on investment, a
sole shareholder would be hard pressed to justify any reasonable salary less than profits
before the salary and payroll taxes.

For an established business which has built up goodwill based on years of service and
location, a reasonable salary can be quite a bit less than profits.

[S T]

No Assets

This is strictly a Consulting Business, and there would be no assets placed in the S corp or LLC.

T/p history is to receive $ XXX,XXX salary from prior employment , so I can't imagine less than profits if a S Corp were formed, based on prior wage history.

Seems that would eliminate a lesser reasonable salary through wage compensation at S Corp level and shifting excess to distributions.

More brainstorming ideas?

Thanks,

Sandy

[DTS]

Sandy

Could your client become a PSC and if so, how would that play into the scheme of this for them? I think that there has to be some sort of professional designation or license in their state, but I'm not totally sure about that.

D

[Corduroy Frog]

No PSC

Not a personal service corporation, as those professions are defined in the code. A representative selling health insurance/benefits is not one of them.

The personal service corporation loses its concern if an S corp is selected, since the lower bracket is only tapped one time.

[Zee]

My typical advice would be "take it slow" and start with a simple sole proprietorship, then as the business develops (or doesn't) take a closer look at the other types of entities available.

A sole proprietor can easily setup a self-insured medical reimbursement plan, a solo-401K, and other tax saving tools.

Most high-end folks losing their jobs try "consulting", but continue to search at the same time for another opportunity (even with the severance pay).

In this economic environment, most large companies are reducing the volume of contracts with outside consultants...not increasing them. So, the start-up could be a little slow.

If another job is found or the consulting doesn't work out in the short-term, it's a lot easier to shut down the sole proprietorship.

[ChEAr$]

Along with Zee's comments

My typical advice would be "take it slow" and start with a simple sole proprietorship, then as the business develops (or doesn't) take a closer look at the other types of entities available.

A sole proprietor can easily setup a self-insured medical reimbursement plan, a solo-401K, and other tax saving tools.

Most high-end folks losing their jobs try "consulting", but continue to search at the same time for another opportunity (even with the severance pay).

In this economic environment, most large companies are reducing the volume of contracts with outside consultants...not increasing them. So, the start-up could be a little slow.

If another job is found or the consulting doesn't work out in the short-term, it's a lot easier to shut down the sole proprietorship.

might as well go ahead and form an LLC, which costs a lot less than incorporating.
After all, it will be schedule c anyway with the flexibility of electing S corp status later
on after goodwill is built up.

[MLINDER42]

Llc

In MD it costs $300.00 a year for a LLC plus if it has any assets you must pay Personal Property Tax.So unless you need the liability protection it is costly for start ups.

[S T]

Psc

Doesn't the personal service corp rules only apply if the t/p is a C Corp?

Sandy

[Zee]

In MD it costs $300.00 a year for a LLC plus if it has any assets you must pay Personal Property Tax.So unless you need the liability protection it is costly for start ups.

Yes, the registration fees in most states are probably similar.

[Lion]

Start Slowly

If she wants to give herself significant fringe benefits, health insurance for instance, as least investigate a C-corporation. My usual advice to clients starting a new business is to start as a sole proprietorship or maybe an LLC, disregarded entity; because it's a lot easier to move up the entity tree with no or few tax consequences than it is to back down the tree. Incorporating won't eliminate the need for a good insurance policy.

[S T]

Thanks

Thank you to everyone that posted all of the good information.

Sandy