Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 0 down vote favorite

I am an engineer that will soon be having a sole client, an Austin, TX based company. I will be providing my services while working from my home office (in NY state); occassionally (say, once in a month or so) I will be flying down to Austin for a couple of days at a time, working out of their office.

For the purpose of getting paid, I'd like to establish an LLC / LLP; My objectives are as follows:

(1) The business entity should pay zero corporate taxes; All taxes etc should be passsed through to me (i.e, as an individual, I will pay taxes only when the LLC pays me a salary)

(2) The business will have as little paperwork to do / keep up (if possible, as little annual report / annual return forms as possible; The scale of the business will be small, so hopefully I should have no costs of lawyers / accountants etc)

(3) Most cost effective -- the costs of opening the LLC/LLP, and any annual reports / recurring fees should be as low as possible

Just to make things clear, I plan to be a one-man shop, doing all of my work remotely, using my laptop (no inventory, office, employees, sales staff etc).

P.S. Will I need to register as a 'foreign LLC' in New York State, where I live? note that I will have no contracts / business engagements there -- I will just be working on my laptop.

share|improve this question
Why aren't you just a sole proprietor? What's the liability you're seeking to protect yourself from? – Chris Fulmer May 15 '12 at 2:00
Chris -- no liability issues; I just want to be able to NOT pay taxes on money that remains in the company; If I am a sole proprietor, I will be 'forced' to withdraw all the money and pay taxes on all of it. In the structure I suggested, I want to withdraw small salaries and have the rest of the money (untaxed) in the company. – user3262424 May 15 '12 at 15:57

2 Answers

up vote 2 down vote accepted

Based on your comment, that won't work. An LLC is a "Pass-through" entity, in that money the LLC makes shows up on your tax return, even if it stays in the LLC's bank account. In fact, if you're the only member of the LLC, the IRS will disregard it entirely, and act like the money it got went straight to you.

Now, you can tell the IRS "Please treat this LLC as a corporation," in which case money the company makes wouldn't be taxed to you until it's distributed to you. But, then the LLC has to pay its own taxes. That's likely not what you want either. Worse, since you're providing engineering services, the company would be treated as a "Personal Service Corporation," which means that every dollar is taxed at 35%. (Non-PSCs have graduated rates -- the first $50K is only taxed at 15%, for example.)

The general rule is that if somebody makes profits in a tax year, they have to pay taxes on it in that year. Having an LLC, corporation, trust or what not only changes the identity of the person paying those taxes.

share|improve this answer
Chris, thank you for your answer. I really want the money to remain in the company, and be taxed only when it is withdrawn; Is there any arrangement I can have to get this done? For example, what if the LLC members are non-Americans (in such a case, I will be an outside contractor and have no ownership in the LLC)? – user3262424 May 15 '12 at 17:22
Chris: "An LLC is a "Pass-through" entity, in that money the LLC makes shows up on your tax return, even if it stays in the LLC's bank account" -- what does it mean? What will happen if the LLC is owned 99% by a foreign person (non-American) and 1% by me (American)? what will be shown on my taxes? – user3262424 May 15 '12 at 17:25
If it's owned 1% by you, 99% by the foreigners, then you pay taxes on 1%, and the foreigners pay taxes on the other 99%. They would have to file a form W-7 to get a US Taxpayer number in order to file a US tax return. The amount the foreigners pay is complicated and determined, in part, by tax treaties that the US may have with their home governments. Outside my expertise. – Chris Fulmer May 15 '12 at 17:36
Thank you chris; (1) Will the foreigners have to pay taxes on money that has not been withdrawned from the LLC? (2) Is there some business entity that will allow me to not pay taxes on money that has not been withdrawned from the company? – user3262424 May 15 '12 at 18:21
2  
(1) Yes. The LLC is still a "pass-through" entity, even if they're foreign. From the IRS' perspective, it doesn't have any money of its own -- it's all earned by the company's members. (2) If there were an easy way to do that, then EVERYBODY would be doing it. There might be something you could do with having the company held completely by a self-directed IRA. But, that's way outside my experience. – Chris Fulmer May 15 '12 at 18:54
show 1 more comment
up vote 1 down vote

I concur with Chris regarding all the tax issues. To answer the question about foreign registering in NY, the answer is here: http://www.dos.ny.gov/cnsl/do_bus.html

Statute offers little guidance on the nature of the business required for qualification. For example, Business Corporation Law § 103(b) provides, "This chapter applies to commerce with foreign nations and among the several states, and to corporations formed by or under any act of congress, only to the extent permitted under the constitution and laws of the United States." However, as the preceding discussion shows, that is a truism. Beyond that, Business Corporation Law § 1301(b) and its analogs offer only nonexclusive lists of activities that do not constitute doing business. As a class these are activities that have to do with maintaining the organization's status as an entity. Examples include holding meetings of owners or managers, maintaining bank accounts, and defending actions and proceedings.

I am not a lawyer so I cannot give you the interpretation of case law. But as a personal observation, I see nothing in the analysis that says merely living in NY triggers the requirement nor anything that affects online businesses. Also, from personal observation, the NY Franchise tax board doesn't have the resources to hound everyone who simply has an address in NY who may be doing business online.

share|improve this answer
Thank you Henry. I appreciate your help! – user3262424 May 15 '12 at 22:38

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.