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0 pointsrsweeney216y ago0 comments

> I did this for a while, but it starts to hurt around tax season. There are advantages to being incorporated and then hiring yourself as an employee for a minimal wage. With the way you're doing it, you're paying employment taxes on your entire income. With an LLC, you can pass the majority of it through without paying that.

I'm not exactly sure what you mean by this, but LLCs are pass through entities for tax purposes. That means your tax treatment is the same for an LLC as it would be if you were a sole proprietor without an LLC.

The reason to create an LLC is to separate your personal assets from your business assets and to protect you from liability for your employees actions. If your LLC signs the contract, in most cases the client can only go after the business, not you personally.

However, almost all lenders require a personal guarantee and an LLC doesn't protect you from your own negligence. Only from the negligence of your employees.

So basically - LLCs are unnecessary if you are the only employee.

See: https://www.nolo.com/legal-encyclopedia/limited-liability-pr...

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tfehring6y ago

The tax benefits come from electing to be treated as an S corp for tax purposes, not from establishing an LLC per se. But as far as I'm aware, you need to establish an LLC or other corporate entity in order to be taxed as an S corp.

It's true that creditors can come after your personal assets if you personally guarantee a corporate entity's debt. But establishing an LLC does limit your personal liability in any instance where you don't provide a personal guarantee. I suspect that many individual freelancers who establish LLCs never take on debt or other liabilities that require personal guarantees.

maratd6y ago

> So basically - LLCs are unnecessary if you are the only employee.

This is not true for many reasons, primary among them being taxes and healthcare.

I'll explain taxes below. For healthcare, I use Trinet as an HR provider (since I am a company) and they allow me to get benefits (including healthcare) at corporate rates. You need to be incorporated for them to even talk to you.

> I'm not exactly sure what you mean by this, but LLCs are pass through entities for tax purposes.

Happy to explain. When you are self-employed, you pay SECA taxes on your entire income.

https://www.investopedia.com/terms/f/fica.asp

For self-employed, that means both the employer and the employee portion. Let's say you pull in 300k. You're going to pay SECA taxes on all of that.

If I create an LLC, do an S-corp election, then retain myself in the LLC for say 50k, I will only pay those taxes on the 50k. The other 250k will be passed through to my personal income and I will only be responsible for the standard income taxes.

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