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Question for the Money Doctors

Question submitted on Jul 29, 2011.

Question

I have about $300k taxable income a year from a sole proprietor business and i want to retire about 5 years from now at age 60 and i plan to incorporate and have the business carry on after i retire and let my workers run it. It''s an online business and each worker works remote from their home. I have 3 full time employees in India and 2 part time guys in the USA that earn a commission.

I expect to hire a few more people and I''ve never visited a CPA, so i pay a lot of taxes. Should i choose a S Corp or LLC and should i incorporate in my state or some place like Delaware or Nevada?

Should i wait 4 years to incorporate or go ahead now?

Answer

First, a corporation and an LLC offers certain creditor protection that you do not receive as a self employed individual.  It is generally the wise thing to do, and you should do it now

Second, an LLC (limited liability company) is issued by your state of residency and has nothing to do with your election to be recognized and taxed as a self employed individual, partnership or corporation.  This election is a federal election and is made using federal form 8832.

If you have settled on an S Corpation, you can simply file an application for a corporate charter within your state of residency and then file federal form SS4 (federal identification number) and identify that you want to be taxed as an S Corporation.

Lastly, a business netting $300,000 per year certainly needs the guidance and help of a CPA, and it goes way beyond tax planning.  If you sell your business in 5 years, your CPA will guide you through the process and save you considerable cost and aggrevation during the transition. 


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