ForumsStarting a Business

No question that an S-Corp can reduce unemployment taxes, however it may not be the "right" structure for several reasons: (1) An S-Corp has no flexibility in how profits are split among owners. The profits must be distributed according to the ratio of stock ownership, even if the owners agree it would be more equitable to distribute the profits differently; (2) The IRS is very careful to check whether a salary paid by an S-Corp is reasonable by industry standards -- and if they determine that the salary is too low and that earnings are being "hidden" as distributions, they are quick to penalize and reclassify the distributions as salary; (3) An S-Corp tax return is more complex and time-consuming than the simple pass-through LLC (and the problem is multiplied if the state also has a corporate income tax) -- so the additional cost of an accountant/tax expert or the time for an owner to do taxes himself (159 hours for an S-Corp versus 3 hours for an LLC, according to the IRS) could easily eat up all the employment tax savings for a business that has only modest earnings. New entrepreneurs have to think about ownership strategies, project their earnings, and run the numbers to decide what will be best for them.

1. The situations pointed out are not that "uncommon."
2. An LLC only files a 1065 if it has two or more members and chooses to be taxed as a partnership -- which would be uncommon among my client base, and I think among most of the busines owners in this community. About 65 percent of LLCs have a single member/manager who elected to be disregarded as a separate filing entity, so earnings are passed through and shown on the personal tax return which is as simple as it gets. Most of the rest elected to be taxed as a corporation, which is also an option.

I agree that an S-Corp can offer major advantages, but it has distinct disadvantages, too -- especially for the ultra-small one entrepreneur start-up.

Jay: Are you in the U.S. on an H-1B or other temporary visa? Do you have employees, or is this a one-person operation (just you)? When you formed your LLC in Virginia, did you designate that it was member-managed or manager-managed? I can offer better advice on whether I think an S-corp is a good idea and how you can do it with your answers to those questions. Thanks.

Jay, I don't know what an "LLC Partnership" is -- and if you're the sole owner, I don't know how you'd convert to any type of partnership structure anyway.

According to IRS instructions for form 2553, whether you are an LLC or a corporation, you can elect to be taxed as an S-Corp if you satisfy eight specific tests -- one of which is that the entity cannot have any nonresident alien shareholders. So provided you qualify as a resident alien for tax purposes (on the basis of "substantial presence" since you don't have a Green Card as yet), it seems like you would simply complete and file Form 2553 with the IRS to elect for your LLC to be taxed as an S-Corp, if desired. (Note: If you want it to take effect this tax year, you must file by March 17.)

I'm not an accountant or immigration attorney, so there may be other factors I'm not aware of -- but this is how it looks to me and I hope the information was helpful.

Is it a good idea to have a LLC own 3 other LLC. Or should i Make one a C Corp to own the other 3. And also can a LLC loan money to other LLC's.

Well im going to be doing retail/entertainment/real estate. My enterprise is just the parent company of the other three that will be like divisions doing all of the work. I want the other 3 companies to take loans from the parent company so the parent company will holding all assets and the other 3 holds the debt. Im in iowa and i also plan on starting a non profit corp. I want to bring entertainment to iowa.(This is a thought i have not formed the LLC's yet but plan on doing so within the next week.)

If the real estate is rental real estate, you all but definitely don't want that to flow to any kind of corp, not even an S Corp. If it is a development or flipping business, that would be ok to flow to a corp or LLC.

How profitable for tax and/or accounting purposes is each entity expected to be? What about positive cash flow? If there is a spouse in the picture and the businesses are independent enough, you could structure the ownership to maxime tax and employment benefits to the owner(s).