Corporation for Tax Savings?
December 15, 2012 11:55 AM   Subscribe

Consultant, LLC for Tax Savings?

I may have a job offer with a decent salary but the salary will be paid to me in a freelance position.

1. I know that you are not my CPA. But might it make sense to form an LLC and have the money paid to the LLC (or an INC)?

2. Also, one important question: could you make pre-tax investments, like Real Estate, with such an LLC?

PS: I have read the previous question:
posted by yoyo_nyc to Work & Money (5 answers total) 1 user marked this as a favorite
what do you mean by "pre-tax" - like you could fund the LLC with pre-tax monies and use that to make investments? No.

The reason why you have an LLC is 1) to create a liability buffer between your business and your personal assets 2) to facilitate tax planning under certain circumstances.

But for a single person entity it probably won't have much in tax savings because the LLC's income will just pass through to your personal income taxes and it sounds like you wouldn't really be much more than a sole propreitor . Also I'm not sure if this would apply to you, but you may have to pay UBT for an LLC in NYC. I do.

But the main reason to have it is for liability purposes. Its pretty cheap to do. Just it won't save you a lot in taxes, and may actually not be worth it if you have to pay UBT.

Forgot to mention - you have to pay UBT no matter what, but its tax deductible for sole proprietors I believe.
posted by JPD at 12:05 PM on December 15, 2012 [2 favorites]

As an employer in Massachusetts I have been informed that we can only hire people as contractors if they have an LLC (or corp). Otherwise we would be in violation of state and federal labor laws. So it could benefit your employer if you formed an LLC.

As far investing in real estate and such pre-tax, that's really a question for an accountant in your jurisdiction. The answer will likely depend on a lot of details that you haven't given here.
posted by alms at 12:21 PM on December 15, 2012 [1 favorite]

I am bound to any specific state with the incorporation. Will be out of the states most of the time.

"income will just pass through to your personal income taxes "

Is this really the case? If the LLC has 100k income and pays let's say 30k for an office space then it is my understanding that only 70k are passed through to you. Not 100k. But maybe my understanding is wrong. If such an LLC could also make investments, let's say rental properties, for future cash creation, would all of the 100k "income" really be passed through to me?
posted by yoyo_nyc at 12:52 PM on December 15, 2012

If the LLC has 100k income and pays let's say 30k for an office space then it is my understanding that only 70k are passed through to you. Not 100k.

That would also be true without the LLC, because you would deduct the 30k of office space rent on your Schedule C. In the question which you linked to, Netzapper gave the most useful answer about why creating an LLC is very helpful.

Making investments like rental properties would mean acquiring "capital assets" which depreciate over time, and that depreciation is deducted, not the actual purchase of capital assets itself. But consult your accountant about stuff like that, because laws differ... and the latter case would be the part where the limited liability of an LLC becomes useful, because any liability is counted against those assets, not your assets. My understanding as a non-lawyer is that if the LLC has no assets and is effectively "just you", then the "limited liability" doesn't apply.
posted by deanc at 1:00 PM on December 15, 2012

JPD's comment about liability protection is half right. The LLC vehicle will protect you from personal liability for the actions of others employed by the LLC. It will do nothing to protect you from personal liability for your own errors.

That is what insurance is for.
posted by megatherium at 2:31 PM on December 15, 2012

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