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Old 02-25-2017, 12:12 PM
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LLC vs. S Corp with $10 million in profit

I know there's a lot of information out there about the differences of S Corp vs. LLC vs. C Corp, but I have a specific hypothetical scenario that I would like to seek others' opinion on as to which entity type would save the most on taxes and make most sense given the revenue and business type, and what steps he can take to

1. John comes to the US from China.

2. He already owns T-shirt inventory in China that cost him $5 million which he purchased with his personal funds.

3. He would now like to open a business in the US, and start a web site here in the US to take orders from people in China to sell his inventory directly to people in China (let's set aside the possibility that he can easily just go back to China and make the transactions there without having to do).

4. He opens a business PayPal account and links it to his website so that he can accept credit card payments here.

5. Within one year, he sells every single T-shirt at a total revenue of $15 million. Since the inventory cost him $5 million, his net profit is $15 million minus $5 million equals $10 million.

You can spot at least one issue here, and that is the inventory was not purchased by his US business, and thus it's cost likely cannot be reported as an expense.

Any thoughts here as to how the scenario would have to change in order for him to be able to expense the $5 million purchase?

For example, what if John got a hold of the inventory only AFTER he started his US business, where he went back to China and struck a deal with the manufacturer for $5 million of T-shirts, but only on something like a consignment, where he wouldn't have to fork out any money at the outset. In this change of scenario, what documentation would he need from the manufacturer in order to later use as proof to the IRS that he should only be taxed on $15 million minus $5 million equals $10 million? Must there be a receipt showing that, AFTER he received the $15 million, he paid the Chinese manufacturer the $5 million that he owed?

Now as for taxes on the $10 million in profit, which business entity would be optimal, if he decides to cash out the $10 million in profit at the end of the first year of business for personal use? I would say S corp since there's not double taxation. But then there's that mandatory, reasonable salary requirement.

a. What would you propose he pay himself? Maybe a $100,000 salary? Would that $100,000 then be subject to self employment tax?

b. And then would the remaining $9,900,000 be taxed at the Federal and state level? Federal being 35%. What about state level tax? Is it lower in New York or Delaware? Which state would be best for his situation?

c. Would any of the above work out better if he had an LLC structure instead of an S Corp?

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