Again, thanks for your question.
I started writing this really complex explanation of how you'd be
taxed in each scenario, then realized that it's not really relevant -
there are two important issues to consider here:
1) More income, less taxes - you'll all end up with more money in your
pocket if you work as contractors for your S-Corp because - either as
an LLC or as an SP - you'll be able to expense stuff you could not
expense as an employee. Therefore, it is prudent to somehow make such
2) Liability - since you're already set up as an S-Corp vis-a-vis your
company's clients, you are covered as far as liability is concerned -
opposite your company's clients - whether you choose to go the LLC or
the SP way. HOWEVER, as an SP, you are liable towards your S-Corp.
This may not seem like a big issue right now, but if the three of you
are not getting along as wonderfully a couple of years down the line,
you may end up being sued by your own company one day... So, whether
to go LLC or SP is somewhat related to how you predict your
relationships with your partners will develop in the future. In
addition, as I had pointed out earlier, the SP route is typically far
Would be glad to discuss further as required!!
Please let me know if this reply has been satisfactory.
Clarification of Answer by
19 May 2003 14:08 PDT
As regards your clarification request - I don't believe you will be
able to gain much financially by introducing an additional layer; if
you were, then theoretically you could continue to implement such
layers to the point where you would not be required to pay any taxes
at all, right?
Clearly, you would be able to show somewhat greater expenses by
introducing another entity, but you would also incur a little bit of
additional fees for incorporation and legal purposes + you will
complicate your bookkeeping and increase the probability that one day
you'll make the kind of mistake the IRS would go to town on...
On the other hand, this is one possible way in which you could resolve
the liability issue - but then the interim layer would have to be an
LLC or worse, another S-Corp.
I would not trade off the complexity for this added protection unless
I was really worried about getting sued by my company/partners one
day, in which case I'd probably not go into business with them in the
Does that answer your question?
Please let me know, would be glad to provide further clarification if