Quote:
Originally Posted by Rapture
OK, it's starting to make sense.....thank you.
I do have a partner, so I guess it would default to a Partnership unless I set up and S-Corp or C-Corp. It seems first thing I should do is set up an LLC, which doesn't seem to be a big deal. I have no employees at the moment, so I guess I can wait and meet with a good CPA and/or Attorney to discuss my specific situation and get advice. If that's not set up until let's say next year, then for 2007 we would be taxed individually on personal income but not have to pay any employment tax. Is this correct?
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I agree with the above comments... you should talk to someone now, not later. If you wait, you risk getting into trouble... especially since there is only a narrow window of time when you are allowed to elect S status for a tax year. It has to be done (working from memory here, this could be wrong, but it should at least be close) within 2 1/2 months from the date of incorporation. Now, that's with a regular corporate entity... now that I think about it, I'm not sure what the limit would be with an LLC, since you would also have to file an election to treat the LLC as a corporation. I'm not sure when the 2 1/2 months would start running. Anyway, my point is that you need good advice at the beginning of the year, because if you do decide an S corp is the way to go, you *cannot* do it later on in the year. You would have to wait until the following tax year (then the 2 1/2 months runs from the beginning of the year), and the current tax year may cost you.
If you have a partner, then you have a de facto partnership (even if there is no formal partnership agreement). Properly, for tax purposes, the partnership would file a 1065, part of which would show the split of profits between the partners. Those profits would then flow through to your individual 1040s, where you would pay income tax as well as self employment tax on the income. You do not escape self employment tax.
There are planning opportunities available with S Corps to minimize some of the self employment taxes, but this has to be carefully done to stand up to IRS scrutiny. There's no opportunity to minimize self employment taxes with a C Corp, but with C Corps there is the opportunity to write off far more than with any other type of entity.
Really, now is the time to talk to a CPA.
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