Single Entity LLC vs. Partnership LLC

[bgrd]

Hello,

I’ll be working remotely from FL as a contract software engineer for a company based in WA and have some questions in regards to opening an LLC. The software company currently has one other software engineer as contractor who is working remotely from the same state as the company (WA). Myself and the other engineer are each paid the same percentage of the company gross as compensation. I’m interested in the pros/cons and legal/tax obligations of opening either a LLC Partnership with the other developer or an LLC as an individual. This is what I know/understand as of right now:

LLC as an Individual Filed in FL
- Pro: Simplest approach.
- Con: Paid as a single entity - don’t have the security of being in a partnership with the only other developer?
- Question: Should I file the LLC as a “Disregarded Entity” or as an “S-Corp”? I understand the basics of both, but what are the pros/cons long term?
- Is an LLC S-Corp more complicated when it comes to filing taxes?
- Assuming the dollar amount of the percentage grows as the company grows, would it make more sense to file as an LLC S-Corp because I will be eligible to pay more of the income as dividends and therefore pay less social security/medicare taxes?
- Is there any advantage or difficulty in switching from “Disregarded Entity” to “S-Corp” after the LLC has been formed?
- Question: Should I open a bank account in the LLC name to receive the income (direct deposit) then for tax purposes all income deposited in the bank account passes through to me?

LLC as a Partnership (split 50/50) Filed in FL
- Pro: One source the company has to pay - since we’re the only two developers less likely to have any issues.
- Con: Taxes will be a headache
- Question: If the company wants to pay by direct deposit would we then have to open an joint bank account in the LLC name with both of us as co-owners? Whose social security number goes on the bank account?
- Question: What are the tax / income concerns since the other developer is based in WA?
- Question: How does taxes / income distribution work if either of us have “contract income” separate from the company we are working for? Would it be more appropriate to open up another LLC for individual side projects? Is it even possible/appropriate to put income either of us make from other work into the partnership LLC?
- Question: If for some reason the salary from the company is not to be paid equally, is there any problem apportioning it appropriately (as long as all income is accounted for) or must it always be a 50/50 split?
- Question: What happens if either myself or the other engineer moves on, no longer working for this company? Do we need to dissolve the partnership LLC leaving the engineer that continues to work for the company to open up a different LLC as an individual? I have seen references to dissolving a partnership.

Any information/advice/direction you can provide would be greatly appreciated.

 

[LdiJ]

Hello,

I’ll be working remotely from FL as a contract software engineer for a company based in WA and have some questions in regards to opening an LLC. The software company currently has one other software engineer as contractor who is working remotely from the same state as the company (WA). Myself and the other engineer are each paid the same percentage of the company gross as compensation. I’m interested in the pros/cons and legal/tax obligations of opening either a LLC Partnership with the other developer or an LLC as an individual. This is what I know/understand as of right now:

LLC as an Individual Filed in FL
- Pro: Simplest approach.
- Con: Paid as a single entity - don’t have the security of being in a partnership with the only other developer?
- Question: Should I file the LLC as a “Disregarded Entity” or as an “S-Corp”? I understand the basics of both, but what are the pros/cons long term?
- Is an LLC S-Corp more complicated when it comes to filing taxes?
- Assuming the dollar amount of the percentage grows as the company grows, would it make more sense to file as an LLC S-Corp because I will be eligible to pay more of the income as dividends and therefore pay less social security/medicare taxes?
- Is there any advantage or difficulty in switching from “Disregarded Entity” to “S-Corp” after the LLC has been formed?
- Question: Should I open a bank account in the LLC name to receive the income (direct deposit) then for tax purposes all income deposited in the bank account passes through to me?

LLC as a Partnership (split 50/50) Filed in FL
- Pro: One source the company has to pay - since we’re the only two developers less likely to have any issues.
- Con: Taxes will be a headache
- Question: If the company wants to pay by direct deposit would we then have to open an joint bank account in the LLC name with both of us as co-owners? Whose social security number goes on the bank account?
- Question: What are the tax / income concerns since the other developer is based in WA?
- Question: How does taxes / income distribution work if either of us have “contract income” separate from the company we are working for? Would it be more appropriate to open up another LLC for individual side projects? Is it even possible/appropriate to put income either of us make from other work into the partnership LLC?
- Question: If for some reason the salary from the company is not to be paid equally, is there any problem apportioning it appropriately (as long as all income is accounted for) or must it always be a 50/50 split?
- Question: What happens if either myself or the other engineer moves on, no longer working for this company? Do we need to dissolve the partnership LLC leaving the engineer that continues to work for the company to open up a different LLC as an individual? I have seen references to dissolving a partnership.

Any information/advice/direction you can provide would be greatly appreciated.

You really need more of a face to face consultation with a tax professional. You have a huge amount of questions that really need some back and forth discussion and that doesn't work very well on an internet forum. Find someone local that is open year round and they will be able to help you.

I will however give you some information about S-corps (or LLCs that elect S-corp status). They file a separate tax return, but the income then flows through to the shareholder's personal return via a Schedule K-1. You have to pay yourself a fair market wage, with proper withholding and a W2 at the end of the year, for the work that you do, and any profits in excess of your fair market wage can be distributed as dividends, not the other way around. Dividend is not really the right term to use either, because the income flows through from the K-1.

I personally would not enter into any kind of partnership with someone who works in another state. There would be far too much room for problems.