LLC as a resident?
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That's an interesting question. Are you asking about this because you do a lot of moonlighting or consulting on the side? Or is there another reason that you feel that forming an entity might be helpful to you?
Also, as you go on through your professional career, you will find that there is a jargon unique to the financial world. I'm not nitpicking, but I would like to point out that "incorporating" and "forming an LLC" are two very different things. LLC actually stands for Limited Liability Company, and is an entity that is very different than a corporation. While both entites provide business owners with some amount of protection from certain risks, LLC's that have only one member are not even recognized by the IRS as a distinct taxable entity unless an election is filed with the IRS.
Based on the circumstances, there are times when LLCs make sense and times when corporations make sense. And then there are times when the costs and headaches of forming and maintaining an LLC or Corporation outweigh the benefits. It's a good idea to talk to a lawyer or CPA about whether it makes sense to form an entity.
Also, as you go on through your professional career, you will find that there is a jargon unique to the financial world. I'm not nitpicking, but I would like to point out that "incorporating" and "forming an LLC" are two very different things. LLC actually stands for Limited Liability Company, and is an entity that is very different than a corporation. While both entites provide business owners with some amount of protection from certain risks, LLC's that have only one member are not even recognized by the IRS as a distinct taxable entity unless an election is filed with the IRS.
Based on the circumstances, there are times when LLCs make sense and times when corporations make sense. And then there are times when the costs and headaches of forming and maintaining an LLC or Corporation outweigh the benefits. It's a good idea to talk to a lawyer or CPA about whether it makes sense to form an entity.
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I understand what you're saying that "incorporating" is not associated with a Limited Liability Company and that the jargon was misused, but why is it that one of the initial documents in forming both an LLC and an Inc/Corp is the "Articles of Incorporation"? Maybe they misused the jargon as well.
I also had no idea that single-member LLCs weren't recognized as distinct entities (as opposed to a sole proprietorship). I coulda sworn that single-member LLCs separated the owner/manager's business books from his personal books in the event of liability or tax purposes. I guess it uses Schedule C on the 1040, but I may have to reconsider forming an LLC if that's the case.
I have a ton of reading to do on this. 😕
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I am part owner of a sleep lab (for which I read sleep studies), have an outpatient practice, do some sleep lab inspections for the American Academy of Sleep Medicine, and do a little consulting on the side. I have looked at various business forms for some or all of these activities and have come to the following conclusions:
1. It is impossible for a physician to escape personal liability for medical malpractice.
2. it is nearly impossible for a practicing physician to escape paying social security taxes. Even with a chapter S corp, you have to pay social security taxes on any portion of the profit that can be considered "earned income". SS taxes phases out at about $103,000; its hard for a physician to argue that the first $103,000 from a medical practice should be considered distributed profits and taxed at the longterm capital gains rate.
3. Through creative accounting/business organization, some of the medicare tax (2.9%- doesn't phase out) can be avoided. Physicians making more than $200k may want to consult with an attorney/acountant to discuss ways of doing this.
1. It is impossible for a physician to escape personal liability for medical malpractice.
2. it is nearly impossible for a practicing physician to escape paying social security taxes. Even with a chapter S corp, you have to pay social security taxes on any portion of the profit that can be considered "earned income". SS taxes phases out at about $103,000; its hard for a physician to argue that the first $103,000 from a medical practice should be considered distributed profits and taxed at the longterm capital gains rate.
3. Through creative accounting/business organization, some of the medicare tax (2.9%- doesn't phase out) can be avoided. Physicians making more than $200k may want to consult with an attorney/acountant to discuss ways of doing this.
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LLC=Limited Liability Corporation, not company. LLC is a form of a corporation, but a corporation isn't always an LLC.
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An LLC is not a corporation. It is a different type of legal entity. It has different governance rules and different rules as far as annual reports to the states.
An LLC can report its income as a sole proprietorship, partnership, corporation or S corporation. If you mess with this see a tax attorney or CPA.
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While we are nitpicking: The document I have in front of me to form an LLC is called 'Articles of Organization'.
I am still not sure what the OP is trying to achieve by forming some sort of corporation.
I knew some folks during residency who had a business entity on the side for their moonlighting income. It allowed them to make a good share of their life tax-deductible. Any trip could be combined with some CME activity which allowed them to legitimately reimburse themselves out of corporate money. The 6000lbs SUV was a business asset and as it was a 'truck' under Bush administration rules, it was eligible for a crazy depreciation in year1 (you then have to pay 'rent' on your car for private use, but in the end it still allowed the moonlighting income to be offset by lots of the expenses routed through the corp).
Some of this but not all can be achieved by filing 'schedule C' for your moonlighting income.
Once you are past the maximum contribution for social security and medicare, there is no benefit from routing the money through a corp in that respect.
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I actually wrote an article for MDTAXES about whether it makes sense to incorporate or not. For people who earn a good salary, and then do some moonlighting or consulting on the side, the costs of incorporating can far exceed the benefits.
Here's what I came up with (keep in mind that I wrote this in 2005, so some of the thresholds are from a few years ago):
Like every business decision, you first need to evaluate the costs and benefits of incorporating. Let's start with the costs.
DescriptionAmount 1. Cost to incorporate$1,0002. Minimum tax (varies by state)$5813. CPA fee to prepare corporate return$5004. Unemployment taxes and Workers Compensation insurance$3005. Payroll processing fees$6006. Extra social security taxes$3,100 Total costs$6,081
Here's what I came up with (keep in mind that I wrote this in 2005, so some of the thresholds are from a few years ago):
The Costs
Like every business decision, you first need to evaluate the costs and benefits of incorporating. Let's start with the costs.
- It costs money to incorporate. In Massachusetts, expect to pay about $1,000 in legal and filing fees to incorporate. You also need to budget another $1,000 or so in fees when you're ready to dissolve your corporation. The fees in your state probably won't be much different.
- Many states require corporations to pay a minimum tax each year for the privilege of doing business in their state. In Massachusetts the minimum tax for corporations is $581 per year, in California it's $800, and in NYC expect to pay $400 per year. That doesn't include the cost of having a CPA firm prepare your corporate tax returns, which could easily run $500 per year or more.
- You also need to put yourself on payroll. If you don't want to deal with all the headaches associated with payroll, you have the option of either having your CPA help you out or using a payroll service. Either way, expect to pay at least $600 per year. And don't forget about state unemployment taxes and workers compensation insurance on your salary. The amount you'll owe varies by state, but if your state is similar to Massachusetts, you'll pay a minimum of $300 per year.
- Don't forget about the extra social security taxes. This quasi-hidden tax can get quite expensive to people who incorporate. That's because your corporation, just like your other employers, is required to withhold social security taxes at a rate of 6.2% on the first $90,000 (in 2005) of salary earned from them. Each corporation then matches the social security taxes withheld from your pay. So while you'll get back any social security taxes withheld during the year on the salary drawn from your corporation (assuming your salary from another employer exceeds the social security max of $90,000), you don't get back the company match. Draw a salary of $50,000 from your corporation, and the government keeps the $3,100 company match. As a sole proprietor, you wouldn't pay this tax.
DescriptionAmount 1. Cost to incorporate$1,0002. Minimum tax (varies by state)$5813. CPA fee to prepare corporate return$5004. Unemployment taxes and Workers Compensation insurance$3005. Payroll processing fees$6006. Extra social security taxes$3,100 Total costs$6,081
The Benefits
Okay, for $6,000, you'd expect some pretty big benefits, right? Besides possible protection from some risks (which you would need to discuss with your attorney), what are the benefits of incorporating to a professional who earns a good salary each year and does some moonlighting or consulting on the side?
I don't have a good answer for you. Pretty much everything that is deductible to a corporation is also deductible to a sole proprietor. Some expenses, such as the home office deduction and vehicle expenses, are actually easier for an unincorporated business to claim.
Do you any children under the age of 18? If so, you can reap a huge tax break by employing your child - provided you don't incorporate. While you as the parent and business owner get to deduct the wages paid to your child, the child owes no federal income taxes on up to $5,000 earned (in 2005), and no social security, Medicare or unemployment taxes on any money earned from you. Once you incorporate, this tax break is no longer available.
And if you're looking to shelter some of your income by setting up a tax-advantaged retirement plan, you can set up an equivalent retirement savings plan for your sole proprietorship as you could for a corporation. These days, self-employed individuals are setting up Solo 401(k) plans, SIMPLE IRAs, or SEP IRAs.
I don't have a good answer for you. Pretty much everything that is deductible to a corporation is also deductible to a sole proprietor. Some expenses, such as the home office deduction and vehicle expenses, are actually easier for an unincorporated business to claim.
Do you any children under the age of 18? If so, you can reap a huge tax break by employing your child - provided you don't incorporate. While you as the parent and business owner get to deduct the wages paid to your child, the child owes no federal income taxes on up to $5,000 earned (in 2005), and no social security, Medicare or unemployment taxes on any money earned from you. Once you incorporate, this tax break is no longer available.
And if you're looking to shelter some of your income by setting up a tax-advantaged retirement plan, you can set up an equivalent retirement savings plan for your sole proprietorship as you could for a corporation. These days, self-employed individuals are setting up Solo 401(k) plans, SIMPLE IRAs, or SEP IRAs.
Look at the Numbers
Before you go through the expense and effort of incorporating your moonlighting or consulting business, take one more look at the numbers. You might find that the costs of incorporating far exceed the benefits.
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Can you set up these things after you already had your employer max out on a 401k contribution on your behalf ?
Setting up an LLC (if your state allows medical practice by an LLC) tends to be cheaper and incur lower maintenance cost than a corp or PC.
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I actually thought about LLCs after I posted that information about Corporations. For people who work as employees, and then moonlight or consult on the side, setting up a single-member LLC might be the best way to go.
The LLC will be an entity viewed separately from your personal finances, and might provide protection from certain risks and liabilities (talk to a lawyer.) But for tax purposes, the single-member LLC is a disregarded entity, unless you make an election to treat the LLC as a corporation.
So you'll treat your LLC as a sole proprietor when preparing your taxes. This can be a good thing, since if you hit the social security max through your employer, you won't need to pay any social security taxes on this additional income. You'll only pay the 2.9% Medicare tax.
You also asked about setting up a retirement plan for your separate business. You sure can. Provided you don't own the majority of stock in your other employer, you can set up a SEP IRA, and put away 20% of your net self-employment income into a tax-deferred account. You also get to deduct the contributions made into the SEP.
It's not too late to establish and fund a SEP for 2007. You have until the due date of your tax return, including extensions, to set up and contribute to a SEP for the prior year.
The LLC will be an entity viewed separately from your personal finances, and might provide protection from certain risks and liabilities (talk to a lawyer.) But for tax purposes, the single-member LLC is a disregarded entity, unless you make an election to treat the LLC as a corporation.
So you'll treat your LLC as a sole proprietor when preparing your taxes. This can be a good thing, since if you hit the social security max through your employer, you won't need to pay any social security taxes on this additional income. You'll only pay the 2.9% Medicare tax.
You also asked about setting up a retirement plan for your separate business. You sure can. Provided you don't own the majority of stock in your other employer, you can set up a SEP IRA, and put away 20% of your net self-employment income into a tax-deferred account. You also get to deduct the contributions made into the SEP.
It's not too late to establish and fund a SEP for 2007. You have until the due date of your tax return, including extensions, to set up and contribute to a SEP for the prior year.
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Or you siphon the great majority of your income out of the corp and pay yourself a minimal salary. If you give Auntie Patricia $400/month to help out with her mortgage, now you give Auntie a paycheck to route your phonecalls (allows her to collect earned income credit on top of that).
I think the main advantage of having a separate corp or LLC is that you have more possibilities to make expenses incurred for your day-job fully deductible. Also, if you fall into the AMT and loose pretty much any ability to deduct f-ing anything, having those expenses run through your LLC will keep them out of your personal income entirely.
Good to know. My 'non W2' income is minor compared with my day-job, but it might be a good way to shelter some of it.
I'll talk to my accountant.
