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Q: Starting a business ( Answered 5 out of 5 stars,   1 Comment )
Subject: Starting a business
Category: Business and Money > Small Businesses
Asked by: daevux-ga
List Price: $10.00
Posted: 16 May 2003 14:46 PDT
Expires: 15 Jun 2003 14:46 PDT
Question ID: 204828
I have already created an S-Corp for an IT related business. This
business is owned by three people, including myself. There are no
employees of the business, technically (noone is on payroll). Instead,
we do work as independent contractors for the S-Corp. A good friend of
mine, who is very experienced in business, has suggested that I create
an LLC just for me. Ergo, any work that I do will be as my LLC, and
the S-Corp will pay the LLC (not me, personally). Then, the LLC will
pay me. Supposedly, this will benefit me when paying taxes. However, I
am new at business and it seems overly complex (and would require more
capital for startup fees), especially since I don't intend on making
more than $20k/year for myself. I need a second opinion. Thanks.

Request for Question Clarification by ragingacademic-ga on 16 May 2003 15:08 PDT
daevux -

Interesting and important question.
I would recommend that you start a company as a sole proprietorship,
rather than an LLC - startup fees for an sp are around $50-$60, and it
will allow you to expense everything you need to.

What kind of support would you like to see for such an opinion?


Request for Question Clarification by serenata-ga on 16 May 2003 17:12 PDT
Hello Daevux ...

Did your friend explain why he felt you should form a limited
liability corporation to pay yourself through an S-Corp?

It seems a bit convoluted when you already have a corporate structure
in place to handle the liability issue, and taxation is taken care of
in the pass-through advantages enjoyed by an S-Corp.

I might be missing something here - so it would help to know why he
suggested you form a corporation to be paid by a corporation.

Any illumination would help.


Clarification of Question by daevux-ga on 16 May 2003 20:30 PDT
I believe my friend is coming from a tax standpoint. He believes I can
avoid the ~39% tax that IC's would have to pay. Can anyone think of
how this would be possible? If it is - is it too complicated to be
beneficial (or would I have to pay the difference for asprin) ? An
acceptable answer that I'm looking for would just be a yay or nay and
why as to if I should form a separate entity to represent just myself,
what it should be (LLC, SP, etc), and how much I would save by doing
so. Of course I would like to save money by paying little tax (within
legal limits, of course), but I don't want me or my accountant to
become confused or frustrated. I am aware of my state's (GA) fees for
forming each entity, so you won't have to research that.

Request for Question Clarification by serenata-ga on 16 May 2003 21:28 PDT
Here's an article from, entitled "Setting Up Shop on The

While she does address California and Nevada corporations,
specifically, she does mentions forming a second partnership (not
corporation) and getting paid by the  partnership.

"You minimize that by creating another company , a partnership that is
paid by your Nevada corporation. Your second company only receives
enough money to cover expenses. Your Nevada corporation pays you a

At least there are some comparitive figures from which to draw some
conclusions and/or clarify your question better.

Is this the type of information you are looking for?

I used the search term "s-corp payroll regulations" and it offered
dollar comparisons, and wondered if this is the type of information
you were looking for.

Subject: Re: Starting a business
Answered By: ragingacademic-ga on 16 May 2003 22:03 PDT
Rated:5 out of 5 stars
daevux - 

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
an arrangement.

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
less expensive.

Would be glad to discuss further as required!!
Please let me know if this reply has been satisfactory.


Request for Answer Clarification by daevux-ga on 19 May 2003 12:11 PDT
I would like to ask for a clarification on bullet 1, about taxes. I
agree about the IC vs employee deal - I have already decided to work
as an IC and not employee. My question is this: should I be an IC
directly, or should I start a separate, smaller entity which is the IC
for the S-Corp, and I work for the smaller entity (adding a layer
between me and the S-Corp)?

Clarification of Answer by ragingacademic-ga on 19 May 2003 14:08 PDT
daevux - 

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
first place.

Does that answer your question?
Please let me know, would be glad to provide further clarification if

daevux-ga rated this answer:5 out of 5 stars

Subject: Re: Starting a business
From: funkywizard-ga on 16 May 2003 18:12 PDT
The biggest advantage to an LLC is that if the company goes bankrupt
or does something illegal, you are less liable for those actions than
you would be if the business were run as a sole proprietership.

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