Incorporation: LLC w/DBA as SCorp

[LdiJ]

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."

Good catch AJ. I think that the rest of us missed that.

 

[Taxing Matters]

You may elect for the LLC you have to be treated as a S-corporation if you wish. As LdiJ noted, you do that by filing a Form 2553 with the IRS. The LLC may conduct both businesses if you want. And if you wanted to do the software business using a different name, you’d use a trade name (what many people refer to as a DBA, though in this context that term is not precisely correct). The trade name is simply a name under which you conduct business. It is not a separate entity so you could not make a S-corporation election for just the business conducted under the trade name. There are, however, various ways to set this up and which is best depends on the details of both businesses. Without those details I could not recommend a particular structure for this. In particular the details of the income for the two businesses matter as to whether it would benefit you to make a S-corporation election.

The first thing that needs to be decided, I think, is whether you want both businesses run out of the same entity (same LLC). Doing that makes it easier to share the benefits of the two businesses but also means that each business will be at risk for problems of the other business. That decision will then set up your next set of options.

 

[FlyingRon]

It's officially a "fictitious name" filing in Pennsylvania. Yes, DBA and TA are colloquialisms.

His question wasn't so much tax but to worry about risk form the new business affecting the assets (presumably his rental property) in the existing LLC. Comingling the two business in LLC certainly would open that up. A DBA won't change that. It's not clear if even two LLCs (one for each business) would help a whole lot when there's only one person involved.

 

[Taxing Matters]

It's not clear if even two LLCs (one for each business) would help a whole lot when there's only one person involved.

In at least most states it would help, as each LLC is a separate legal entity, just as would be the case if they were two corporations. The fact that they have common ownership wouldn't matter, assuming of course that each LLC is properly capitalized and they are operated properly to maintain their separate existence (e.g. no commingling of assets between them, etc).

 

[FlyingRon]

I'm not saying it isn't a good idea to keep them in separate LLCs, I'm just saying is it may not be sufficient. His "negligence" or whatever imagined personal behavior that would lead to a judgment may he held to him personally (not limited to the services LLC) and then the fact that he is the sole member of the other LLC might make that entire LLC an asset for whatever judgment he envisions might happen against him.

 

[Taxing Matters]

I'm not saying it isn't a good idea to keep them in separate LLCs, I'm just saying is it may not be sufficient. His "negligence" or whatever imagined personal behavior that would lead to a judgment may he held to him personally (not limited to the services LLC) and then the fact that he is the sole member of the other LLC might make that entire LLC an asset for whatever judgment he envisions might happen against him.

That's true. Many people don't understand what limited liability means when it comes to LLCs and corporations. As the summary AdjusterJack posted (which is not quite an exact quote from me, but it’s pretty close) illustrates the benefit of limited liability for a LLC with just one owner is, well, a bit limited. The LLC will not protect the owner against claims resulting from his/her own negligence. It will also not protect the owner against debts of the business that the owner personally guarantees. But if each business is in its own LLC and one of the businesses ends up going under it at least won't take down the other one with it (assuming the owner is not personally liable for the debts that are sinking the one business). How much risk there is of that varies depending on the types of businesses involved.