LLC! No, No scorp!. No, No LLC!

[TAX]

Client registered business (medical lab) as a LLC. He registered In Nov 05. For some reason, he has not started his business yet. He got equipments under this llc.

(1) I think he would be better of as scorp rather than LLC as he has to pay SE tax on LLC income

(2) Another alternate is to file election (8832) to be taxed as scorp. Is it too late to do it?
This way he does not have to pay for scorp setup. For Scorp March 15 is coming up to be effective 01/01/2006

(3) How about client just forgets LLC (business not started yet) and form Scorp

Please let me know your thoughts.

[BOB W]

Llc/se

My understanding relating to SE and LLCs is the same as SCorps. SCorp use W2 and LLC use garanteed payment. Both LLC profits and SCorp profits are not subject to SE taxes.

[TAX]

My understanding relating to SE and LLCs is the same as SCorps. SCorp use W2 and LLC use garanteed payment. Both LLC profits and SCorp profits are not subject to SE taxes.

Guranteed payment is not madatory. Payroll is.

LLC profit does have SE unless election is made to treat as scorp.

[BOB W]

Congress....

has ruled not to rule on this issue and has left this issue open after IRS tried to make all profits of an LLC partnership subject to SE tax. As of the latest that I have heard there is no SE on LLC's net profit. If you want SE it is done through GP.

I have been filing LLCs (partnerships) for many years and never had a problem with this.

Read TTB pg 5-25

[rosieea]

has ruled not to rule on this issue and has left this issue open after IRS tried to make all profits of an LLC partnership subject to SE tax. As of the latest that I have heard there is no SE on LLC's net profit. If you want SE it is done through GP.

I have been filing LLCs (partnerships) for many years and never had a problem with this.

Read TTB pg 5-25

Bob - are you saying that all LLC members are treated as limited partners, even the managing members?

[Bees Knees]

Bob - are you saying that all LLC members are treated as limited partners, even the managing members?

It depends. As Bob said, there is no rule or guidance. You are on your own.

I advise my clients to do it just like S corps. Take a reasonable amount for guaranteed payments, subject to SE tax, and then the rest on line 1 of the K-1, not subject to SE tax, even for LLC managing members.

[Matt Sova]

Hold the phone people

Yes LLC profits are not SE taxable - if it is a multi-member LLC. If it is a single member LLC then you report on Schedule C and pay SE tax on the profits.

If you want to switch this to an S-Corp for tax purposes all you have to do is file form 2553 and elect January 1, 2006 as the start date. No need for the 8832 if you are electing S status.

As far as #3 goes, the only reason I would switch it to a Corp over the LLC (which he has already paid to put in place) is if the annual Corp fee is substantially less than that of an LLC. I know some states have outrageous annual LLC fees.

Matt

[DennisM]

My approach to the SE tax on multi-member LLC's is not to simply allocate the profit between guaranteed payments and pass-thru profit, but to look at the particulars of the business.

It's not uncommon, especially in LLC's, to have one or two 'active' members who run the business and one or more 'silent-ish' members who are basically investors. In this case, and in others as applicable, I look at the frequency of the payments to the members and the amounts. If there are, for example, biweekly payments in the same or similar amounts over a period, this simply shouts 'guaranteed payments'. Such an allocation on the return and on the books would be appropriate.

[BOB W]

Allocations...........

.......... can be any method you wish as long as there is some economic reason for net profits to be different then ownership percents.

I like LLCs (partnership) when there are several members that proform very different functions or no function at all. Under an SCorp, you are forced to have higher payrolls in order to get the net profit lower so the non functioning shareholders get a smaller distribution.

[OldJack]

Yes LLC profits are not SE taxable - if it is a multi-member LLC. If it is a single member LLC then you report on Schedule C and pay SE tax on the profits.

The existing proposed regulations:

Profits of a LLC-1065 is subject to SE tax by the individual member/partner unless the member/partner meets the limited partner rules, (1) has no personal liability for the debts of or claims against the partnership solely by reason of being a partner; (2) has no authority to contract on behalf of the partnership under the law of the jurisdiction in which the entity is organized; or, (3) participates in the entity's trade or business for no more than 500 hours during the taxable year. Guaranteed payments, of course, are always subject to SE tax.

However, if substantially all of the activities of a LLC-1065 involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or CONSULTING, any individual who provides services as part of that trade or business will not be considered a limited partner, meaning the individual will always be subject to SE tax on the entire distributive share from all interests the individual has in the service LLC/partnership.

Profits of a LLC-1120S would be the same as if it was a S-corp. Profit/property distributions not subject to SE tax must be allocated the same as an S-corp based upon the percent of ownership regardless of any LLC operating agreement stating otherwise.

[JON]

Proposed

Are those not the same regs congress told them to stop. I think everyone should be aware of those, but still waiting to see if IRS can win. I you have a two member LLC doing accounting and tax and you have 20 employees I will not hesitate to attribute part of the income to assets other than the members for SE purposes. Do this by guarantee payments... Still has to be resolved, but no guidance at this point. I think Congress told them not to use the Proposed(IRS).

[OldJack]

Are those not the same regs congress told them to stop.

I think what was withdrawn was the 1994 proposal and not the 1997 replacement. The law is pretty clear on firms that do accounting regardless of the number of employees.
Here is a link to the info I had quoted:

http://search.irs.gov/web/query.html?amo=&qp=&sac=0&bmo=&orq=0&ff=0&chkbox11=0&chkbox12=0&chkbox9=0&chkbox14=0&qt=limited+partner&chkbox6=0&chkbox7=0&chkbox4=0&chkbox5=0&chkbox2=0&chkbox3=0&chkbox0=0&chkbox1=0&chkbox1=0&qm=0&charset=utf-8&byr=&chkbox8=0&ady=&rq=1&qc=&chkbox13=0&mp=url%3Aid%3D98137%2C+proposed+regulations&qs=-Wct%3A%22Internal+Revenue+Manual%22&inthe=604801&bdy=&col=allirs&oq=proposed+regulations&ayr=

[Matt Sova]

Wrong

First of all it was 1997. Second of all, what you quote here is PROPOSED Regs. These carry absolutely no weight what-so-ever in applying tax law. The LLC issue is still a very grey area of the law that probably will be resolved in the courts since congress been sitting on this issue for 9 years.

Matt

[OldJack]

Second of all, what you quote here is PROPOSED Regs. These carry absolutely no weight what-so-ever in applying tax law.
Matt

I clearly identified in my original post that this was "Proposed Regs" for a LLC-1065. That as far as I know is the only thing we have today to hang our hat on. You have nothing for your position other than partnership regs that clearly say SE tax.

[TAX]

Slight twist......

There is one other way you can "legally" avoid SE tx.

LLC can have more than one class of stocks Vs. Scorp.

LLC has two classes of members: Regular vs. Limited. In my research, only member with Regular "class" pays SE. This does requires special LLC setup. but it works and as a result you can reduce SE tax "significantly". Obviously, you will issue small amount on K-1 to regular member and large amount to Limited member.

Has anyone done this before? Is this legal? I just need some input. I have not done it yet.Is it too good to be true?!

Thanks.