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View Full Version : Could use some guidance on LLC and Tax formation


adaptivehomeservices
10-27-2006, 12:54 AM
I am researching the tax aspect of my forming an LLC. Do I need an EIN# for a single owner LLC with no current employees? I will eventually have employees so should I try and obtain the EIN now...my bank might need it right?

Any thoughts would be greatly appreciated!

topsites
10-27-2006, 02:55 AM
Yes, get the EIN if for no other reason than to save yourself from the stupid questions.

Taxwise, how much do you enjoy doing them?
If you like doing taxes, then I would recommend being an employee, and using this basic formula:
Gross - (expenses + labor) = profit
This way you pay taxes on a small profit (remember, even $100 / year is a profit), and you come out ahead by paying the bulk of the taxes on your labor (withholding both federal and state, social security (don't forget you have to match this with your own contribution so double 7.5% = 15%) and I forget what else) and don't forget FUTA (unemployment tax). In a nutshell that takes care of it, and you'll need to file 941's quarterly (federal, forgot the state form) and W-2's once / year and I am sure there is one or two other things.
This way is considerably more paperwork, you'll have to figure withholding according to the charts and don't forget you'll need at LEAST 4 envelopes and write 4 separate checks quarterly and fill out all the forms and make SURE you put the right check with the correct form in the corresponding envelope before the deadline and all sorts of fun stuff will make you an expert in no time 'atall.
If you decide to go this route, you'll likely want to call your LLC a member-based company for tax purposes.

If you do not enjoy the tax department as much, the simpler method is to pay yourself out of the profit after you pay the taxes on same, with this basic formula:
Gross - expenses = profit.
Remembering that taxes on profit are higher than labor taxes, you will pay more to do it this way, but you need only be concerned filing 1040-ES (federal) and 740-ES (state but this likely varies) quarterly and then you file the 1040-A annually thou I use Quickbooks for that, to ease the pain. This way is considerably easier on the paperwork, two quarterly checks for estimated taxes (one state + one federal) but the checks you send off are for larger amounts, you pay yourself whatever you want, remember that something needs to be left for new equipment or whatever, and the IRS figures your Social security benefits and all that crap.
Should you decide to go this route, you'll likely want to call your LLC a Sole Proprietorship for tax purposes.

One way you spend more time doing taxes, the other you spend more time working to pay the higher bill, I have done it both ways and I can almost guarantee that no matter how you decide to do it, you either waste your labor doing more taxes or you pay them more so you can do other things, it all comes out about the same in the end.

Good Luck.

adaptivehomeservices
10-27-2006, 09:07 AM
Thank you very much for taking the time to answer my questions. I am always amazed at the time someone on this site will take to help a stranger.

In my LLC filing, I have elected to be considered a "Disregarded Entity" as a single owner of the LLC and for tax purposes will be considered a Sole Prop.

The following is a clip from the IRS that I used to make my decision:

A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), a partnership or a corporation. If the LLC has only one owner, it will automatically be treated as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or disregarded entity (taxed as if it were a sole proprietorship) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification Election. If a taxpayer does not file Form 8832 (PDF), a default classification will apply.

So your scenario #2 applies for me. This is my first LLC but this method is familiar to me with my past Sole Prop. business.

Thanks again...fun stuff!