Incorporation: LLC w/DBA as SCorp

[pixelrogue1]

Pennsylvania:

This information was provided as advise from a high priced lawyer...and want to vet it here to see if I am understanding properly.

Many years ago I set up an LLC for real estate rentals and everything has been going fine.

This year I started out on my own as an independent software consultant....which has been my career just now I am going solo as corp-to-corp. (s-corp; specifically for extended retirement contribution options)

Rather then setting up a new corporation from scratch, the lawyer recommended simply utilizing the existing LLC, and set up a DBA.

Fast forward a few weeks, I have everything set up. What remains unclear is the s-corp designation.

Is the s-corp designation assigned up front (state govt stated there was no way to designate actual corp type,) or maybe set up at the time of doing taxes (just make sure to follow the s-corp rules and set aside enough to pay taxes)?

 

[PayrollHRGuy]

s-corp status is not set up with the state at the time of creation. The LLC in your case is a disregarded entity you account will deal with it at tax time just as he has been.

What are the current value of the assets of the LLC at this time? I'm asking for a reason.

 

[LdiJ]

Pennsylvania:

This information was provided as advise from a high priced lawyer...and want to vet it here to see if I am understanding properly.

Many years ago I set up an LLC for real estate rentals and everything has been going fine.

This year I started out on my own as an independent software consultant....which has been my career just now I am going solo as corp-to-corp. (s-corp; specifically for extended retirement contribution options)

Rather then setting up a new corporation from scratch, the lawyer recommended simply utilizing the existing LLC, and set up a DBA.

Fast forward a few weeks, I have everything set up. What remains unclear is the s-corp designation.

Is the s-corp designation assigned up front (state govt stated there was no way to designate actual corp type,) or maybe set up at the time of doing taxes (just make sure to follow the s-corp rules and set aside enough to pay taxes)?

The s-corp gets set up with the IRS. Ones fills out form 2553 to make an s-corp election. However, I am a little unclear as to what he has told you to do. Did he tell you to make an s-corp election for the DBA or for the LLC? Neither would make a lot of sense to me, to be honest, but there is a tax attorney who posts here that may have a different opinion.

 

[PayrollHRGuy]

LdiJ I assumed the DBA was a DBA of the LLC.

I asked the question I asked to know if the LLC has a significant amount of property that might be at risk for mistakes made as a independent software consultant.

 

[pixelrogue1]

s-corp status is not set up with the state at the time of creation. The LLC in your case is a disregarded entity you account will deal with it at tax time just as he has been.

What are the current value of the assets of the LLC at this time? I'm asking for a reason.

Low asset value. No ownership of property, mail a day-to-day for banking, paperwork and such.

 

[pixelrogue1]

The s-corp gets set up with the IRS. Ones fills out form 2553 to make an s-corp election. However, I am a little unclear as to what he has told you to do. Did he tell you to make an s-corp election for the DBA or for the LLC? Neither would make a lot of sense to me, to be honest, but there is a tax attorney who posts here that may have a different opinion.

LLC remains the same as always.
DBA defined as an S-Corp

 

[FlyingRon]

If it's a one man show, you don't need an S corp election. It's already passing through directly.

You can use a DBA if you want to use a name other than that of the LLC (or some other legal entity) to do business under.

DBA's don't have "S corp" elections. They don't exist independently, they're just fictitious names for some existing entity, be it your LLC or a corporation or your own personal name. You can't do an S corp election on a DBA or some aspect of an LLC while not treating the whole LLC as an S Corp for tax purposes.

If someone gave you this advice they were clearly insane or you didn't understand them.

 

[pixelrogue1]

LdiJ I assumed the DBA was a DBA of the LLC.

I asked the question I asked to know if the LLC has a significant amount of property that might be at risk for mistakes made as a independent software consultant.

Answered above. Low value no property or value. Also have insurance for error/omission risk.

 

[LdiJ]

LLC remains the same as always.
DBA defined as an S-Corp

I do not believe that you can do the bolded. The DBA would have to be a separate entity in order to make an s-corp election.

 

[LdiJ]

If it's a one man show, you don't need an S corp election. It's already passing through directly.

You can use a DBA if you want to use a name other than that of the LLC (or some other legal entity) to do business under.

DBA's don't have "S corp" elections. They don't exist independently, they're just fictitious names for some existing entity, be it your LLC or a corporation or your own personal name. You can't do an S corp election on a DBA or some aspect of an LLC while not treating the whole LLC as an S Corp for tax purposes.

If someone gave you this advice they were clearly insane or you didn't understand them.

I agree with everything except the bolded. There can be advantages to making an s-corp election outside of the pass through issue.

 

[FlyingRon]

I do not believe that you can do the bolded. The DBA would have to be a separate entity in order to make an s-corp election.

You can't do an S Corp election on a DBA, period. You can only do an S Corp election on a Corporation or LLC.

A DBA can't change the behavior of one it is referring to. All it does is provide a registration of the fact you're not operating under the legal name of the entity, be it a person, LLC, or corporation.

 

[LdiJ]

You can't do an S Corp election on a DBA, period. You can only do an S Corp election on a Corporation or LLC.

A DBA can't change the behavior of one it is referring to. All it does is provide a registration of the fact you're not operating under the legal name of the entity, be it a person, LLC, or corporation.

Which is way I said that the DBA would have to be a separate entity...in other words, not a DBA.

 

[FlyingRon]

I agree with everything except the bolded. There can be advantages to making an s-corp election outside of the pass through issue.

Yes, but for a personal services business, that's not going to happen. All of the corporate income is going to have to be treated as salary for the worker. You're not going to have a lot of revenue that can be taken as a dividend.

 

[adjusterjack]

No ownership of property

In the LLC?

Then why have an LLC for rentals if the rentals aren't owned by the LLC?

I think you, like many, have the wrong idea about what an LLC does for you. The following has been culled from information provided by Taxing_Matters:

"The LLC form of business, like the corporation, protects the owners of the business from personal liability for the debts of the business. For example, if the LLC enters into a contract with a third party and breaches it, the LLC is liable for that, but the LLC members are not unless they personally guaranteed the contract, which is something that lenders and astute business people often insist upon. The LLC member is always responsible for his own debts and wrongs, including liability for the negligent acts he performs for the business (and for which the LLC might also be liable). There is also the possibility of “piercing the corporate veil” (google it) which is an even bigger risk for single member LLCs.

The LLC form of business does not protect the LLC from being sued. What it does, when the LLC is operated properly, is prevent the owners from being liable for the LLCs debts simply because they are owners. Owners of sole proprietorship and general partnership businesses are personally liable for all debts of the business just because they own the business. Owners of LLCs, LLPs, and corporations are not liable just because they own the business.

But the LLC does not protect owners of the business from everything. For example, an owner of a LLC will be personally liable for any loans/credit of the LLC that the owner personally guarantees. Most lenders/businesses that extend credit to small business will routinely demand those personal guarantees. You are also always liable for your negligence. So if you are negligent while doing work for the LLC and someone is injured, both you and the LLC are liable for that. You protect against that possibility with a good insurance policy. Also, the law makes owners of businesses personally liable for a few specific obligations of the LLC, like certain tax obligations for example. So where does the LLC protect you? You will not be personally liable for contracts that the LLC enters into that you do not personally guarantee. You will also not be personally liable for the debt that arises from the negligence of other employees/owners of the LLC. Again, this assumes you run the LLC properly so that a creditor cannot successfully pierce the corporate veil to go after you personally."

 

[LdiJ]

Yes, but for a personal services business, that's not going to happen. All of the corporate income is going to have to be treated as salary for the worker. You're not going to have a lot of revenue that can be taken as a dividend.

I agree to an extent and disagree to another extent. If the OP gets a fair market wage for the number of hours put in, there can be room for the rest of the income to pass through as a distribution (dividend is not appropriate terminology).