Q:

Subject: Basics of Corporations

Hello Kerry,

 

First of all, thanks so much for taking the time to put together and to post the Corporations Internet page. Your explanations are excellent, and so helpful!

 

I have a question, and I can only hope that you have a minute. Am I to understand that an LLC can protect personal assets much like a corporation can? My brother and I are starting a landscaping business (in NC), and of course it will be quite small (for starters)—just us two.

 

From what I’m reading, a simple LLC is the way to go, until we get a little bigger, and then we may want to consider an S-Corp. Will we still be protected as an LLC (assuming we have basic liability insurance for our business)? Just in general, for a small startup, would you advise an LLC?

 

Thanks so much for taking the time to read my questions. I hope you have a moment to respond. But in any case, thanks again for the great information you’ve posted!

 

Best Regards,

A:

As I always say, there is no such thing as a one size fits all for businesses.  Neither is it wise to base important decisions such as this on anything other than a direct consultation with a tax pro who understands how to set things up in the best way for your and your brother’s unique circumstances.

That said, there are a few issues that need consideration in your email.  

First, it this true that the LLC entity, if used properly, can shield its members from personal liability in the same way as a corporation.

However, if you already see a need for an actual corporation down the road, I don’t see the benefit of starting off with an LLC as a “bunny slope” towards your ultimate goal.  LLCs can’t be converted into corporations.  They are technically different kinds of legal entities.  You would need to file brand new paperwork, and pay new fees, to charter your corporation.  I am not familiar with North Carolina’s LLC and corp paperwork; but in many states, the LLC paperwork is actually more complicated and the fees are more expensive than they are for corporations.  It is also occasionally the case that the taxes on LLCs are higher than they are for corporations. That is definitely the case in California, which assesses a tax on LLCs based on their gross receipts in additional to the $800 per year minimum tax it hits corporations and LLCs with.  This may not be the case yet for NC; but states that are desperate for revenue do look to the PRC for ideas.

If you do choose to just skip the middle step and set up a corporation, be darn sure you have studied the issues I have raised regarding the pros and cons of C versus S corps.   If your business is going to show profits, S corps can end up costing you a lot more in taxes than will a C.  Your only mentioning LLCs and S corps leads me to believe that you haven’t adequately analyzed this matter.

I have found that LLCs are very useful entities for joint ventures between people.  However, they make most sense as something that will last out the life of the project, and not as a stepping stone to a corporation.  Take a look at the credits of movies.  They are almost always set up as LLCs that are there to account for the expenses and income of that one project, which is a joint venture between various companies and individuals.  When the film and its revenues run out, the LLC is dissolved.  It is not converted into a new corporation.

That is just my opinion.  I’m sure there are some folks, especially professionals who earn fees by setting up LLCs and  corporations, who would love for you to try the LLC and then a corporation.  You’ll be paying them to set up the LLC, to properly terminate the LLC, set up the corp, and possibly terminate the corp.  However, corporations do have potentially eternal life; and can last forever, unlike LLCs and partnerships, which are tied to the life span of their owners.

Those are just some issues to consider when you discuss this with a tax pro.

Good luck.

Kerry Kerstetter

Follow-Up:

Wow Kerry!

 

Thanks so much for the detailed response. It’s so nice of you to take the time to do that, especially since I’m a stranger.

 

After I sent my e-mail to you, I re-read the pages on your site, and I did see how you had pointed out that the C-corp may be a better choice than the S in many cases, and I think that will be the way to go. Also, your response to me highlighted the fact that moving from an LLC to a Corporation is not a simple, or even natural, transition. You’re pointing this out will save us a lot of headache. Thanks!

 

I will definitely take your advice, and talk to a tax pro in NC before making any moves. Thanks again for your kind responsiveness!

 

Best Wishes to you, and know that you’re doing good work!

 

Thanks!

 

 

Taxes for our rulers are like crack to a drug addict. Once they get hooked, they will only want more.

Tax Vampire

If Bush and the GOP can’t make any substantial permanent tax cuts in the near future, such as eliminating the ghoulish death tax for more than just one year, it won’t be pretty for taxpayers when the third Clinton term starts. It will, as always, be more work for those of us in the business of helping people legally avoid paying too many taxes.

Q:

Subject: starting corporation

Dear Kerry,

 

I love your site, I wish you wrote books too. So to my question. I have a roofing / construction business and from your site a C corporation looks best for me. Do you know of any books, other information sites anything where I can learn more about setting up my business to reduce taxes.  I have not been satisfied at all with my accountant or lawyer. I’ve talked to other accounts and lawyers but I can’t find a smart aggressive person to help, so I’m working to learn for myself all I can. If I was a little younger I’d consider this line of work, because there is definitely a need and demand out there. Any way if you know how I can learn more I’d appreciate it and if not thanks anyway for your site and opening my eyes to what’s out there.

 

Sincerely,

A:

I’m glad you found the information I have on my websites useful.  However, it is in no way intended to replace the services of a good tax advisor who understands how to utilize corporations and other techniques to minimize tax and liability problems.  While there are a lot of good books and articles available from Nolo Press on many of the mechanics of operating a small business in the most tax efficient manner, I really don’t know of any books anywhere that can take the place of an up to date person. 

The tax rules are simply too fluid for any book to have a very long shelf life.  In fact, this is the very reason that, in spite of my writing my newsletters over the past 25+ years, I have never felt comfortable with the concept of publishing a book on tax savings tips.  I have always worried about the information in my newsletters becoming obsolete soon after it is written.  With the length of time it takes to produce an actual book, I’ve felt that much of its content would be out-dated by the time it was available to readers.

It is hard enough for professional tax advisors to stay current on the latest laws and regulations.  Unless you intend to give up your construction business and become a full time tax pro, there is no way that you could possibly be successful at both. 

I understand your frustration at being unable to find a tax pro you feel is compatible with your tax savings goals.  I constantly rail against tax pros who seem to be more concerned with maximizing the government’s take than in helping their clients save money.  However, there are plenty of other tax pros out there who share my philosophy that it is our duty to do everything that is legally possible to help clients minimize their taxes.  I am positive that you will spend less time continuing your efforts to locate such an individual than you would trying to become a tax expert yourself.  If you haven’t already done so, please check out my tips for selecting a tax pro.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for the reply, I’m not wanting to do my own taxes I was just wanting to get as much information as

possible so I’ll know enough to pick a good accountant.

I’m not thinking of switching professions either, I was just noting the possibilities a good tax accountant like yourself would have and how many people he could help. I majored in accounting in college many years ago but I didn’t realize how important it was then and not until after I had my own business. I think what I will do when I’m looking for a new accountant is have him go to your site and see if he’s on the same page as you.

Thanks again.

Reply:

Using the info on my site as a sort of barometer to measure the attitudes of other tax pros is a very good idea.  You would be amazed by how many people, including many tax pros, consider me to be evil and unpatriotic for teaching people how to legally pay in less taxes.  You would obviously want to stay as far away as possible from those folks and hold out for someone who understands that there is no sin in using the laws to help their clients reduce their tax burden.

Good luck.

Kerry Kerstetter

 

Q:

Subject: conversion-s corp to c corp

 

can you provide the statement required to be filed with the irs to do the conversion, or the publication where more info can be found?

Thanks

A #1:

You can find the requirements for terminating the S election on pages 2-3 of the 1120S instructions, which you can download from the IRS at: www.irs.gov/pub/irs-pdf/i1120s.pdf

Good luck.

Kerry Kerstetter

A #2:

I was browsing through my Tax Tools programs and saw that the Corresponder program has the following template for revoking the S election.  It’s short enough that I copied and pasted it here.

I hope this helps.

Kerry Kerstetter

Page 1:

Statement to Revoke Sub chapter S Election (IRC Section 1362(d))

To:  Internal Revenue Service
        

Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
        [Client: City, State  Zip]
        ID: [Client: Taxpayer’s SSN/Company FEIN]

The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  , there are shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].

[Client: Taxpayer & Spouse name(s)/Company Name]

By: ____________________________
             (Title)

Date: _____________________

Page 2:

Attachment of Shareholders to Statement of Consent to Subchapter S Revocation

The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer’s SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective .

By:  _____________________________________    ___________________
            Date
        
        
        ID:

By:  _____________________________________    ___________________
            Date
        
        
        ID:

By:  _____________________________________    ___________________
            Date
        
        
        ID:

At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:

            
            
            

 

 

Q:

Subject: Primary Residence Sales: Partial Exclusion

Can I move without paying capital gains taxes?

It’s been 12 long months of putting up with my house and I’m sick and tired of living in my current home. Moving would relieve my stress and improve my health, but I couldn’t afford to move if I had to pay capital gains taxes.

You state in your website that a pro-rated exclusion is available “if the move was made due to health, work, or other unforeseen circumstances. Health reasons can cover a multitude of situations, including just being sick of living there.”

However, the IRS issued a precautionary note: A sale “that is merely beneficial to the general health or well-being of an individual is not a sale … by reason of health.” Further, the IRS regulations stipulate that a preference for a different residence or an improvement in financial condition would not qualify.

What can I do?  Thank you for helping.

A:

You are correct that the health reason needs to be more specific than just feeling better to qualify for the pro-rated tax free exclusion.

However, if you think hard and creatively enough, it shouldn’t be very difficult to come up with an actual health reason.  Factors such as allergies (to things on your property or from the neighbors) and access  (inability to handle stairs) occur very often. 

Safety issues, such as new dangers in the neighborhood with speeding cars or homicidal neighbors, would be examples of justifiable health matters. 

You just need to be able to prove, in the unlikely case that IRS even asks about it, that the situation either changed after you moved in, or you were unaware of it before starting to reside there.  As with all tax matters, the burden of proving the case lies with you and not with IRS. 

Good luck.

Kerry Kerstetter