Monday, July 23, 2007

Business Structures 101

After all of this research, it looks like the structure that will fit our business model better is an S Corporation rather than an LLC.

It all has to do with the fact that we want to get paid wages for the number of hours that we spend working for the business. As it turns out, the IRS is very sensitive to LLCs that make "special allocations" to give profits to members in ways that don't simply represent their ownership interest in the business.

The IRS guide says, "The rules governing partnership allocations (IRC section 704(b) and its accompanying regulations) have been criticized as being some of the most difficult and complex."

Oh, yippee, sign me up for THAT!

So instead, we're going to be an S-Corp, which allows its shareholders to be treated as employees, and it has certain tax advantages over the two LLC models as well. (You don't have to pay the 15.6% self-employment tax on profits.)

Because I'm sure you were dying to know!

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