Hey Tax Guru! This site is awesome!! But I'm still confused! I have been told so many different opinions on my business structure, my head is spinning. I am starting a business based in Tennessee, where I will be driving and the initial investment is under $2000. I will carry commercial and business liability insurance to cover any boo-boo's. My wife and I will be the sole owners/employees of the business and we expect to net around $80,000 for the year. I was going to start an LLC but was told that the LLC would not give the liability protection since I would be considered a "disgarded entity" since we have no employees. If I incorporate as an S corporation, the profits would kill us on taxes. We would either pass all profits along as income and get hit with 15.3% S/E taxes...or with the 50-50 split investment ($1000 each), I would take a 30K salary and split the 50K profit 2 ways. The problem is that we would each pay capital gains tax on $$24,000 ($25,000 profit-$1000 investment). I was told to run as a sole propiertorship since I would have business liability anyway and would be covered since the LLC would be considered a "disgarded entity" and not really benefit me. And I'm not really sure if the LLC would hit me with capital gains tax also, as in the example above. PLEASE HELP! Thank you!

1. "I was going to start an LLC but was told that the LLC would not give the liability protection since I would be considered a "disgarded entity" since we have no employees."

Not true at all! A Single person LLC generally will offer the same level of protection as a C or S corporation.

2."If I incorporate as an S corporation, the profits would kill us on taxes. We would either pass all profits along as income and get hit with 15.3% S/E taxes...or with the 50-50 split investment ($1000 each), I would take a 30K salary and split the 50K profit 2 ways. The problem is that we would each pay capital gains tax on $$24,000 ($25,000 profit-$1000 investment)."

Not true again! There is no capital gains tax on the distributive share of income from an S Corporation. In fact, this net profit after paying you a salary of $30,000 would result in a pass-thru income of $25,000 each to you and your spouse, all this income would be taxed at your marginal income tax w/o imposition of S/E tax.

3. " I was told run as a sole propiertorship since I would have business liability anyway and would be covered since the LLC would be considered a "disgarded entity" and not really benefit me."

Again not true, it is still better to incorporate as a LLC despite being considered a single member LLC. I would recommend that you check with a attorney who is an expert on this subject and is familar with Tennessee Corporate law.

4."And I'm not really sure if the LLC would hit me with capital gains tax also, as in the example above."

No, there are no capital gains tax that result from a profits earned from the operation of a LLC! The profits earned are however all subject to the 15.3% self-employment tax.

__________________
Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.

Wow! Was I way off! So the LLC passes ALL profits down to the owner and gets hit with 15.3% on all of it. But the S corporation pays me a salary, which the S/E tax gets "split". The net profits in the corporation get trickled down to my shareholders (my wife and myself) and are NOT subject to the S/E tax or capital gains tax. At what rate are these proceeds taxed at? Also...could we keep the profits in the S corporation, to expand the business in a few years, and sit on it tax-free? I'm not sure how that works for "holding" money in the corporation. Thanks!