Set up LLC now or later
February 27, 2012 10:37 AM   Subscribe

Asking business question about setting up LLC and tax savings

I am asking for a friend. He will pay for a tax consultant but since it's a simple question, maybe the hive mind can give some generous advice here.

My friend wants to set up a LLC to form a company that create web related products. In the first year, there is no anticipated profit. But there will be $3,000 - $4000 spending on set up and maintain the web site, travel oversees to hire people and form business partners. So is it worth to start LLC now and save tax on those expenses or wait to start LLC later after the partnership is all set and things are more ready for actually running the business? Since this is something he does on top of having a full time job and family work, time, resource, and money are all limited. See, just to hire and meet with a tax consultant takes a lot of resources. That's why he wants to ask here. Thanks a lot! By the way, location is California.
posted by akomom to Work & Money (5 answers total)
Wow, California charges an appalling $800/year LLC tax just for existing. And here I thought Illinois was hard on small businesses. Because of that I don't think it's worth it for your friend unless his personal tax rate averages out to be more than 25% of his taxable income assuming the expenses will actually be in that range. Additionally, he will make best use of his limited time by actually developing the partnerships, projects, etc.
posted by michaelh at 10:43 AM on February 27, 2012

After what I learned from our tax guy and some other people's experiences, it seems like (unless you have payroll to deal with) there's no real reason to start with an LLC.

But we got our California tax guy practically the minute we rolled into the state, just to make sure we weren't going to run afoul of anything with my husband's self-employment. He really should get someone in place before making any mistakes, even if that's inconvenient.
posted by Lyn Never at 11:42 AM on February 27, 2012

There might be some tax savings if he can roll-forward the Net Operating Losses for the first year or so. I know that this is only allowed in very limited circumstances for very limited business types, so there would definitely be value in consulting a Tax Professional.
posted by politikitty at 12:00 PM on February 27, 2012

Ask a tax guy. I have an S-Corp in California that owns an LLC (long story). We had the S-Corp for a long time before we were really making money, for legal purposes. If he's hiring employees, it's beneficial to be incorporated in order to protect your personal assets in case of lawsuits (I believe). But a tax guy should be able to advise on what kind of corporation best fits his needs.
posted by Countess Sandwich at 1:38 PM on February 27, 2012

Response by poster: Thanks for all the responses. For Michaelh's suggestion, my friend decides to hold setting up LLC in California till early next year. Yes, the LLC tax is too high in CA.
Welcome any other comments or recommendations.
posted by akomom at 10:09 AM on February 28, 2012

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