What business entity / type would you adopt for a small retail / wholesale business.

[ggg]

Hello all,

I was hoping to pick the brain of some other business owners who have set up a company in the USA.

I basically want to know the best form of entity; LLC, sole proprietorship, etc... would be to save the most amount of tax. My situation is as follows and I would need the following;

I would want to appear reputable to wholesale, trade and retailers that I deal with and think sole proprietorship may cause doubt.

I will also sell face to face and would like the ability to be protected in terms of liability.

Projected turnover is between 75-125k per annum and I would want to pay the least amount of tax legally.

I appreciate your comments, the suggestions of Wikipedia wont give me the insight of actual business owners and entrepreneurs.

It will be interesting to hear other peoples setup.

Many Thanks in advance,

G

[JKansas]

Most textbooks reccomend llc for it's mix of ease and protection. There are several good books out there that tell you about each option and it's pros and cons. One thing to consider, I noticed a tax law proposal for eliminating capital gains tax for investors who leave their money in a small business c-corp structure for five years or more. C corp is more paperwork and accounting but allows for more deductions. And if that proposal passes you can pay yourself a liveable salary and at the end of five years withdraw your profit tax free (again if it passes and stays as I read it! This is not tax advice, just suggestions on things for you to consider!)

[bhandarigroup]

i am very much agree with JKansas that C corp is more paperwork and accounting but allows for more deductions. And if that proposal passes you can pay yourself a liveable salary and at the end of five years withdraw your profit tax free.

[KyleXY]

There seems to be some misconception here on the new tax law. President Obama proposes a new tax law that will eliminate long term capital gains for investors. That part you got correctly. The part I don't understand is where you're referring to the owner being able to withdraw money (profit) tax free after five years. The bill is to allow benefits for the investors aka Angels and VCs to be rewarded for help stimulating the economy by growing more startups through investments. This has nothing to do with individual business owners who start up their own company, unless I'm misunderstanding some part of that bill.

[JKansas]

If you begin the company as a C corp your investment would purchase shares and make you an investor. I may be wrong, but as I read it, it seems very possible to write your investment as being paid in full with returns after five years and one day. If you don't pay dividends during that time and let the cash acrue as retained earnings then I could see a large payout capital gains tax free... Again, I said it's a lot of paperwork and I may be wrong. But it seems doable to me. I'd be happy for an expert to chime in as either way this bill has the abillty to change the way we form businesses.

Link to original
http://www.law.cornell.edu/uscode/se...?terms=section 1202&url=/uscode/html/uscode26/usc_sec_26_00001202----000-.html

Bill text
Bill Text - 111th Congress (2009-2010) - THOMAS (Library of Congress)

Looks like it is already at 75% for investments now.

[KyleXY]

You trade your efforts whether that's IP or work done including any initial investment for shares of the company as the founder of a C corp, but that does not make you an investor. That just makes you a shareholder. You get issued common stock, as all founders do. Investors get what is called preferred stock. Founders don't get preferred stock. And according to what I've read on the subject, it was design specifically for VCs, however I think it would apply to any investor including Angels. Being a founder doesn't put you into that class.

[JKansas]

But if a founder invests capital (happens a lot) then they should be able to write it up as being eligible. You would only be able to write off the return on yoru cash investment, not anything given for effort or employment. For some that start small and grow fast after a few years of exposure this could be a good strategy. Pay your actual salary very low and then withdraw yoru capital investment plus profit after five years.

[KyleXY]

That initial investment generally doesn't produce any direct gains, therefore it wouldn't be subject to capital gains tax the way investor's money would. There is always initial investment made on the founders part but it's not included in the initial issuance of shares. The way it works is typically you're issued shares base on your work/IP rather than base on the investment you put in initially because you don't want to set valuation to the shares themselves. This can cause false valuation if you do so. Valuation at all times should be set by an actual investment which is why its typical for people to raise seed money prior to a Series A without placing valuation on the stocks. That money is then converted to shares for the seed investor upon trigger of a Series A but that does not include the original founder's investment. That initial investment can be taken back out at a later point as a return to the founder(s) but the increase in gains in the stocks have nothing to do with that initial investment. I'm very familiar with this process as I've been through this more than once and have actually been through an acquisition personally.

Unless I'm misreading the new proposal, it strictly is to offset capital gains increase which has absolutely nothing to do with the initial investment in this equation.

[JKansas]

I'm not disagreeing with your experience. I actually think we are saying similar things although yours is more detailed. My question or thought was more aimed to someone who does not need vc. Say the founder of a website. He forms the business and then seperately purchases stock of an already existing company... IDK the specifics, that's why I am asking. This is where the founder would make a secondary investment to buy stock. This is what he would sell after 5 years back to the company which he already owns.

And it also looks like it is any stock as long as it is directly issued to the investor(and meets a few other rules). Service to the c corp counts as well according to section 26.1202.C.1.B.ii.

[QUOTE](c) Qualified small business stock
For purposes of this section—
(1) In general
Except as otherwise provided in this section, the term “qualified small business stock” means any stock in a C corporation which is originally issued after the date of the enactment of the Revenue Reconciliation Act of 1993, if—
(A) as of the date of issuance, such corporation is a qualified small business, and
(B) except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)—
(i) in exchange for money or other property (not including stock), or
(ii) as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).[/QUOTE]


My point is that if you start a side project, like a website, and can afford to draw little or no salary from it then you could bank the profit as retained earnings and the corp could buy back that issuance of stock making the original founder's (still you) value greater and you would save tax on the extra 50% not already excluded.


I'm still reading this but I would love to hear from a professional to see if this can be written so the small business(up to 50mil) owner (as opposed to VC) can benefit from a c corp and this law? These are totally hypothetical but I am still not seeing why you couldn't issue a second round of stock with you as the investor. There may be a clause i'm missing in the code... but I haven't found it yet, I'll keep looking.

[KyleXY]

It's very uncommon for a C Corp to sell stocks to a founder who is the sole owner of the shares to get preferred stock and again you run into the issue of creating a valuation on your company as a result. In the scenario of you buying stock out from an existing company, that might actually be a different case. Also I understand what you mean in regards to capital gains because even a founder is subject to capital gains on his normal shares. I guess then the clarification that needs to be answered is can this apply to all capital gains. I'm sure a tax attorney can answer that with more accuracy and a lot better than I can

[ggg]

Many thanks for all of your deeply thought over answers, I will seek professional advice, but mention the techniques discussed here to see if they are viable.

[Parvaze]

If you are only going to be generating $75K - $125K then C corp is overkill, with the volume you indicate it really won't matter much whether you go with LLC or Inc (sub chapter S)

[Remotestaff]

Try and also check on business statutes and taxation policies of the specific US state where you plan to register your LLC. Business and tax policies differ from state to state.