Posted October 25, 2016
Ahhhh… what a cute picture. These are not business owners. They might be business sellers. Sarcastically, business ownership does not mean you own a business; it means a business owns you. All kidding aside, pursuing a passion and making it into a business is a great way of life, but certain foundational steps need to be in place for long-term success. Liability, self-employment taxes, retirement savings and solo 401k plans, accountable plans, exit strategies, business valuations, etc. are all considerations that many small business owners neglect. LLC? C-Corp? S-Corp? Perhaps a Limited Partnership? We can help.
The power of advertising, the ease and the hype have created this fervor surrounding the limited liability company. Do you know what LLC really stands for? That’s right.. Lawyer’s Likely Choice. All kidding aside, creating an LLC is an easy way to get your small business off the ground. While there are significant benefits there are many things to consider. Husband and wife? Exit plans? Death and divorce clauses with non-family partners? Self-employment taxes? Business valuation? Rentals? Quick myth buster- LLCs do NOT protect you from lawsuits- limited liability does not mean tort liability. Huge misconception! Please read our KB articles on the ins and outs of LLCs and S Corps at-
LLC Formation Fees
The Watson CPA Group can do all the filings with the Secretary of State (for any state), and our fee is $375-$425 plus the state filing fees. We can file your paperwork in all 50 states plus the District of Columbia. Some states are fast, some still require paper submissions (such as Pennsylvania). Some are slow for no reason, like California. You might also have to file an Initial Report. States such as Nevada and California have an Initial Report Filing requirement and our fee to prepare this filing is $100 plus the state filing fee.
We’ll also obtain your Employer Identification Number (EIN) from the IRS, create an Operating Agreement (for single member LLCs only) and draft an Accountable Plan for expense reimbursements (including the corporate resolution). Three documents (Articles of Organization or Certificate of Formation, EIN and Operating Agreement) are required by most banks for a business checking account. The Patriotic Act and Homeland Security want to clamp down on illegitimate business accounts and financial holdings. This fee also includes your S-Corp election should you need it. Please complete click on the button below to get going!
Yes, LegalZoom might appear cheaper. But after you add on all the bells and whistles, our fee is very reasonable. And, you get excellent business consultation. Way too often people run out and do the LegalZoom thing, and then need to us to unravel a bad decision and put things back together. That gets expensive right quick. So, forming a business is not the kind of thing to be stingy on- get solid answers and solid advice from a trusted tax, accounting and consultation firm. We’ve unraveled enough LegalZoom filings to choke a small horse. Do you know what it takes to choke a small horse? A lot.
Don’t forget that the Watson CPA Group also consults with you on how to account for your business transactions, what tax savings strategies to deploy (forget cars, cars stink as tax havens), what tax deferral plans to implement such as self employed 401k plans or profit sharing plans, and basic business operations. Small business consultation is what we do, and we do it well by catering to your unique needs. You are not special, but you are unique.
Are you considering going into business with a partner other than your wife? Wait! You need to consider some things. What happens if your partner dies? Are you now in business with your partner’s widow.. you know, the crazy one that you could never stand in the first place? Or his kids? You need to strongly consider a partnership agreement that details death and divorce clauses, and first rights of refusal. You must have language that allows the remaining partners to buy back the interest using a third party business valuation. We can refer you to an attorney who will charge about $600 to $800 to draft this paperwork (only in Colorado). We also have one in California that we use often.
LLC Liability Protection (Fallacy)
Can I be sued if I own an LLC? Yes. And you can easily lose on a personal level. And while consultation with an experienced attorney is strongly recommended for your unique situation, as business owners ourselves we feel the excitement of the LLC has overshadowed the reality of our litigious society. In other words, if your acts, errors or omissions injure someone even though it was under the auspice of your LLC, good chances you will be personally named in the lawsuit and held liable as the owner of the LLC.
Officers and directors of corporations are routinely held liable for the actions of the corporation. This is called piercing the corporate veil. Can you say Enron? Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and separating the corporation from its shareholders would promote fraud or an inequitable result. Sounds like about 99% of the LLCs and small corporations out there.
So, what do you do? Securing a decent umbrella policy both at the personal and commercial level is our strong recommendation for liability arising from your acts, errors and omissions. General umbrella policies are $300-$500 per year. We’ve expanded this LLC fallacy in our KB articles.
S Corp Election, Lower Self Employment Taxes
Reducing your self-employment taxes is the main reason business owners want to convert to an S-Corp. There are some issues such as payroll, corporate tax return requirements and passive incomes. But if you have over $30,000 in net profits, you might want to give it some serious consideration. Please read our KB articles on the Taxpayer’s Comprehensive Guide to LLCs and S Corps at-
Basically you will save 7% to 10% of your net income in taxes, and perhaps 9% to 12% if paying for health insurance through the business.
Benefits of Business Formation
Many advantages are available to you when you form an LLC, partnership, corporation or S-Corp. Section 105 Health Reimbursement Arrangements (HRA), retirement contributions and Section 127 Education Assistance are some of the big ones. Avoiding self-employment taxes through an S-Corp. Pulling tax-free money out through an Accountable Plan for your home office. All good stuff.
S Corp Package
The Watson CPA Group specializes in S corporations which have a small number of shareholders, and often just a one-person show. Because it is a core competency for us, we have created an S corp package that includes the following (No, the S doesn’t stand for stormtrooper)-
- S Corporation Tax Prep (Form 1120S)
- Individual Tax Prep (Form 1040)
- S Corp Payroll Events (required by IRS), Filings and Deposits
- Estimated Tax Payments (done thru payroll)
- Q3 Tax Modeling and Projection (Questionnaire)
- Unlimited Consultation and Periodic Business Reviews (PBR)
- Small Business Tax Deductions Optimization
- Annual Processing (W2s and other filings)
- IRS Audit Defense
Our annual fee for the S Corp package is $2,640 (or about $220 per month). Do you want to parse it out? Sure. If you did your own payroll processing, our fee reduces to $2,160. Perhaps saving $480 to add chores to your Sunday is a consideration (yup, that’s a bit sarcastic). If you do your own individual tax return, our fee reduces to $2,240. However, the benefit of the Watson CPA Group preparing both tax returns is that we slide things around depending on income limitations, phaseouts, alternative minimum tax (AMT), etc.
The button below links to our Periodic Business Review (PBR) Agenda. We use this throughout the year as a checklist for our business clients. We can also use it for any type of business consultation.
Since we are so far into the year, our fee for the rest of 2016 is a bit different-
- $375 for late S Corp election ($300 for timely elections)
- $300 for payroll setup
- $350 for Q4 payroll event (to encompass entire year), with consultation
- $700 to $950 (typical) for S corporation tax return for 2016
- Start with S Corp package on Jan 1 2017 (outlined above)
How does all this work? Let’s chat! Your unique situation will probably fit the S corporation world, but a dialogue is much better to determine the viability. Contact us to schedule a complimentary consultation. If all goes well, we will prepare a proposal which outlines the scope of services. View a sample proposal here.
Self Employed 401k Plan
Once you launch your shiny new small business, you might also consider the several small business retirement plans which include solo 401k plans, profit sharing plans, cash balance and defined benefits pensions. For example, with a solo 401k plan or self employed 401k plan piggybacked with a defined benefits pension, you could sock away over $192,000 at age 50. All tax deferred if you like, which could yield a savings of over $86,000 (assuming a 45% marginal tax rate with federal and state). Wow!
Note how we purposely did not mention SEP IRAs. These are old school and are usually designed to be crisis management tools (after the fact) rather than good planning tools and more product self employed retirement plans. Read more about the various self employed retirement options, including retirement tax bombs and the difference between tax deferral and tax savings below-
The Watson CPA Group are business consultants, not just number crunchers. Anyone can balance a checkbook. Anyone can print a paycheck. Anyone can put the right number in the right blanks. But we take a consultative approach to your small business. You can always find someone to do it for less- of course. However consider the solid business services and consultation support which you will get with the Watson CPA Group that other accounting firms might not provide. Read more about our Value Proposition here.
Talk to us today to not just get started, but to get started on the right track!
The Watson CPA Group (team profile)