# LLC or Not



## Amiers (Oct 20, 2018)

Pros and Cons and opinions. 


I was talking with a guy on a strike yesterday/this morning and he said LLC is the way to go. Is it worth it if I’m just freelancing til I find that permanent position.

I have been at it for little over a year now. He said the tax benefits are better. Furthermore he said it’s like 300$ish in AZ.

I’m just having a problem committing if I end up with a real job.

Ramblings at 530am after a strike.


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## Stan Longhofer (Oct 20, 2018)

In my "real" life, I'm a professor of real estate and finance in a business school. LLCs are common for real estate investors, so I know a little bit about this. I am NOT a tax attorney, however, and there are nuances that may apply to certain situations (and states) of which I am not an expert. 

The tax benefits of an LLC (limited liability company) actually apply to all "pass-through" entities, including sole proprietorships (which is what you are if you've never formally formed an LLC or similar entity). As an independent contractor, you should be filling out Schedule C (Net Profit from a Business) on your tax return. On this, you claim all your contract income and you can deduct all of your "business expenses." (Note that this is different from the "unreimbursed business expenses" that anyone can claim as an itemized deduction on Schedule A; those are for people who have a real job but spend money for their work that the employer doesn't reimburse. As an independent contractor, your business related expenses are fully deductible on Schedule C _before_ your net income passes through to your main tax return.) The *net* income from Schedule C "passes through" as income on your tax form. 

You get this "benefit" even if you are a sole proprietorship (not just with an LLC). 

FYI, the new Federal tax law has a special 20% deduction of your pass-through income this means that if your business earns net income of $50,000, you only have to pay taxes on $40,000 of this income. This phases out if you earn a lot of money (levels not likely to be reached by tech contractors). 

The main reason to consider forming an LLC is to provide you with limited liability (hence the name). If you have significant personal assets, this can make sense. In this case, your LLC is the contracted party. If you end up in a lawsuit related to this work, the LLC would typically be the defendant (not you personally). The most anyone could get out of you would be the assets of the LLC (essentially zero), but not your personal assets. Of course, this wouldn't prevent anyone from suing you personally for negligence, in which case all bets are off. But if you had an employee, an LLC might provide additional protections for you. 

I do some private consulting work on the side (not theater related), and I've never found it worth the hassle to form an LLC. A personal umbrella liability policy is all I really need. 

Hope that helps.


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## BillConnerFASTC (Oct 20, 2018)

I think it could be useful and not interfere at all with a full time employment in future. It has been easy and simple for me, probably allows me business deductions more easily or with less likelihood of it being questioned. I think my annual fee is $300 in Illinois but were I doing it over, I'd register in a less expensive state. Tax wise, the IRS treats it the same as a sole proprietorship today - a change since I started in 2005. The business registration seems to make insurance and other such expenses easier. Never any question that my cell and internet service was pre-tax expense. An LLC and Quickbooks has been pretty simple.

I also have a personal umbrella liability policy besides my general and professional (E&O) liability policies. My clients usually ask for a certificate of insurance and this keeps it separate from my personal insurance.


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## SteveB (Oct 20, 2018)

Amiers said:


> Pros and Cons and opinions.
> 
> 
> I was talking with a guy on a strike yesterday/this morning and he said LLC is the way to go. Is it worth it if I’m just freelancing til I find that permanent position.
> ...



Depends on what your are doing. If design, then yes, LLC, for the reasons Stan posted. If a technician as over-hire, you should almost always be an employee of the facility/company doing the hiring, though many less scrupulous company’s/facilities will insist that you are an independent contractor. 

Usually the simple test is if you are required and/or directed to start work at a particular time, you are not an IC (I.E. the call time is 8AM. IC’s get to set their own hours). There are other many other stipulations as noted here.

https://www.dol.gov/whd/workers/misclassification/


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## BillConnerFASTC (Oct 20, 2018)

I like the IRS page https://www.irs.gov/businesses/smal...ependent-contractor-self-employed-or-employee. Prominent on that page, emphasizing the "no magic number" part. More than just when you work or where. You can agree to do a certain task for a certain amount at the clients specified time of day and still be an IC. My clients tell me when to be where for a meeting, but no question I'm an IC. But no matter when you show up, even if its when you want to, if you're doing this and that and another thing as directed by the client, I'd tend to think you were an employee. Moving target IMHO. 

_Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination._


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## RickR (Oct 20, 2018)

Back to LLC issues,
The IRS doesn't know or care if you are a LLC, they are state created and ruled. So get those details ASAP. Filing fees, income reporting and other paperwork are critical and can vary widely.

Having an LLC could make it easier for a future job to separate what is under what company. I've done the independant contractor, while an employee and a company owner. What outfit is doing what must be clearly understood!


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## Amiers (Oct 20, 2018)

Well thanks for all the good information. It all sounds complicated. I didn’t think it was this involved. Looks like I got some research to do.


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## BillConnerFASTC (Oct 20, 2018)

I hope i didnt give the "complicated" impression. Very simple really.


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## TimFrancis (Oct 21, 2018)

I've used this website and book- http://www.artstaxinfo.com/index.shtml - as a guide.

This page - http://www.artstaxinfo.com/setup.shtml - discusses corporations.

Tim


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## ProAdv (Oct 22, 2018)

Amiers said:


> Well thanks for all the good information. It all sounds complicated. I didn’t think it was this involved. Looks like I got some research to do.


Great discussion! My wife and I created an LLC a few years back when we were engaging in some real estate investing. It did seem complicated at first but I picked up Robert Kiyosaki's book, Own Your Own Corporation. A good resource for you to feel like this is simpler than it sounds.


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## porkchop (Oct 25, 2018)

I spoke to my accountant about this last year because I saw in my third consecutive year of +/- $10k in 1099 work on top of my normal W2 job. He told me since I was already claiming a decent amount of business expenses (boots, tools, show tickets for "research",...) that the break even point was about $15k a year if I expected that to be fairly consistent year to year. I didn't expect to be near that so I didn't ask what the break even would be for a single year (assuming you find a W2 gig in the not too distant future). Fees in Nevada are around $300/yr for renewal with the state and it would cost me about $400 on time to establish the LLC so pretty similar it sounds to AZ. The big point he mentioned is that your LLC starts on the day you establish it and you can't write off expenses that occurred before that. So I had to plan ahead of time if I would make it close to the breakeven. I couldn't get to September realize I was already at $15k and start the LLC and claim my expenses for the entire year through it.


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## teqniqal (Oct 26, 2018)

Nevada used to be the go-to place for a cheap LLC, but last year they jacked the fees way up. Consider North Dakota or Montana. I use a company called 'InCorp' to handle the paperwork, and their fees are quite reasonable. They can set you up in any state you want to be set-up in, and they act as a virtual mailing address in that state for passing thru any legal paperwork from the state or IRS.

Side Note: If you are doing any contract work in California, be super aware of their tax laws or you can run a-foul of them quickly. You don't pay the taxes at the next April 15th like most places, you have to pay the taxes within a few months of receiving the contract payments. There may be other states with a similar situation, this is the only one I have personally encountered.


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## egilson1 (Oct 26, 2018)

For me there were several factors into my decision to do the LLC. The first was to protect my personal assets should god forbid I end up in a lawsuit. The big thing with this is you need to make sure you never pierce the "corporate veil". You've got to keep clean records that if needed will show that you kept the business assets and your personal assets separate. This also helps if you end up in financial trouble with creditors. 

Another reason was the marketing perception. I feel that having an actual business name helps portray the image of an established and dependable company that the client wants to be doing business with. 

Just more for you to think about.

Ethan


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## lwinters630 (Oct 28, 2018)

Amiers said:


> Pros and Cons and opinions.
> 
> 
> I was talking with a guy on a strike yesterday/this morning and he said LLC is the way to go. Is it worth it if I’m just freelancing til I find that permanent position.
> ...


The choice of LLC or C Corp or S Corp are first to limit liability from suites or debt. Dont sign anything personally.

Next is tax deduction. Do you want taxes taken first or last? LLC are passed thru as non entity to you on a K1. For small companies with small assets like car, tools etc, I use an S-corp. Basically everything is deductable first anything left is taxed. Remember you have to feed the beast. No money coming makes it tough. But you can show losses as long as your intent is to make money. So no you can't write off your boat.

This status does not affect having a real job. I have a real job, an LLC, and 2 s-corps.

Lastly it is not for sub contractor status, your employer / hire company has the burden to prove that. Your fein will help them prove IC status along with other items, but thats their problem.


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## RonHebbard (Oct 28, 2018)

lwinters630 said:


> The choice of LLC or C Corp or S Corp are first to limit liability from suites or debt. Dont sign anything personally.
> 
> Next is tax deduction. Do you want taxes taken first or last? LLC are passed thru as non entity to you on a K1. For small companies with small assets like car, tools etc, I use an S-corp. Basically everything is deductable first anything left is taxed. Remember you have to feed the beast. No money coming makes it tough. But you can show losses as long as your intent is to make money. So no you can't write off your boat.
> 
> ...


 *@lwinters630* Purely from the POV of an interested retired Canadian following along from home, would you mind explaining / elaborating your term: "*fein*"?
*Edited* to correct an inadvertent spelling error.
Toodleoo!
Ron Hebbard


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## lwinters630 (Oct 28, 2018)

@RonHebbard In the USA it is also known as the Federal *Employer *Identification Number (*FEIN*) or the Federal Tax Identification Number, is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States for the purposes of identification. 

In the USA as an individual, the tax codes require that you pay income taxes on income, either paid to you as an employee or a independent contractor. Many companies want to pay workers as an independent contractor, thereby avoiding withholding taxes and contributing to Social Security and other taxes. There are burdens of proof required of the employer before they can declare that worker an independent contractor. Simply put, direction and control, outside of normal course of business, holding themselves out to the public IE do the have a business that advertises or has expenses like other businesses. Therefore a worker by incorporating they are issued a FEIN number, which is a major proof that worker is not an employee (not the only proof needed).

I hope this helps.


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## BillConnerFASTC (Oct 28, 2018)

I would not rely on having a FEIN as sufficient or even necessary for proving independent contractor status. My company is an LLC, I don't have (or need as a sole owner LLC) a FEIN, and my independent contractor status has never been questioned or in doubt.


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## lwinters630 (Oct 28, 2018)

Amiers said:


> Pros and Cons and opinions.
> 
> 
> I was talking with a guy on a strike yesterday/this morning and he said LLC is the way to go. Is it worth it if I’m just freelancing til I find that permanent position.
> ...


The choice of LLC or C Corp or S Corp are first to limit liability from suites or debt. Dont sign anything personally.

Next is tax deduction. Do you want taxes taken first or last? LLC are passed thru as non entity to you on a K1. For small companies with small assets like car, tools etc, I use an S-corp. Basically everything is deductable first anything left is taxed. Remember you have to feed the beast. No money coming makes it tough. But you can show losses as long as your intent is to make money. So no you can't write off your boat.

This status does not affect having a real job. I have a real job, an LLC, and 2 s-corps.

Lastly it is not for sub contractor status, your employer / hire company has the burden to prove that. Your fein will help them prove IC status along with other items, but thats their problem.


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## lwinters630 (Oct 28, 2018)

BillConnerFASTC said:


> I would not rely on having a FEIN as sufficient or even necessary for proving independent contractor status. My company is an LLC, I don't have (or need as a sole owner LLC) a FEIN, and my independent contractor status has never been questioned or in doubt.


Having one of my companies audited by Illinois department of employment security (IDES) which was triggered by a pearson we treated as 1099 independant contractor filed a claim for unemployment.
During the audit of all my employees I had to prove (the A B C test) that many were independant contractors. The short story is those with an FEIN the agent put into a pile and never looked at. The rest however cost me a lot of money for lawer, fines and penalties. A expensive education.
So you are correct that your LLC status isn't questioned, but for those hired you, it helps a lot if they should get audited.


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## RickR (Oct 29, 2018)

The first and arguably most important step in being an independent contractor is to have a written contract. 

All the rest is what happens when you don't have that.


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## BillConnerFASTC (Oct 29, 2018)

RickR said:


> The first and arguably most important step in being an independent contractor is to have a written contract.
> 
> All the rest is what happens when you don't have that.


Yes. You have an agreement that describes what you will, and otherwise leaves the means and method to you.


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