I'm trying to help a friend setup a business entity by researching the best business structure. This is a multi-member entity with 3 partners, 2 of the 3 are family. It's an event rental business (not real estate) so income will be from sales and services.

I've read one book so far that confused me somewhat on the tax structure.

The author seems to advocate each individual partner being setup as an s-Corp, and then set up the business as an LLC that would be owned by the partner's s-corps. He gives an example of a cleaning company LLC with 2 owners, each owner is an s-Corp.

So, is a single member s-Corp common for this purpose? Google doesn't seem to yield results with such a structure, mostly single member LLCs.

Is there an advantage over the LLC structure owned by s-corps instead of having the business just be an s-Corp owned by the partners? All I can see is that the LLC income gets passed to the s-corps where it becomes dividend instead of regular income?

Looking for some experience or clarification, all help is appreciated.

Also, they already have customers and are doing business so need an entity fast. I recommended setup as LLC to get going and then switch to s-Corp or s-Corp ownership when income and time allows.

Also, they will likely need to hire people for specific events, so would that have any bearing on LLC vs S-Corp? The business is taking off so fast it is over whelming them.

Multi-member LLC with an S-Corp election assuming they meet the requirements of S-Corp status. Doing it the author's way adds an unnecessary level of complexity that does not provide any level of insulation or tax benefit.

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Also, they already have customers and are doing business so need an entity fast. I recommended setup as LLC to get going and then switch to s-Corp or s-Corp ownership when income and time allows.

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S-Corp is a federal tax election, not an entity type.

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Also, they will likely need to hire people for specific events, so would that have any bearing on LLC vs S-Corp? The business is taking off so fast it is over whelming them.

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See above re: LLC v. S-Corp. They can operate as a DBA until the LLC is formed if they wish, but no tax benefit and no liability protection (effectively operating as a general partnership under an assumed name). As for hiring people, I assume they are talking as independent contractors/1099s, and that has no bearing on the entity structure. They will need a FEIN to do so though (and open operation bank accounts).




LLCs can be formed in as little as a week if all of the owners agree on terminology and language and applicable member rights and obligations.

They really need to talk to a lawyer and CPA before forming because if they're getting lost on LLC v. S-Corp, they should not be drafting their own documents - especially when it's family going into business together...


ETA: The only time the author's method would be remotely considered is if one of the members does not meeting the S-Corp election standards and causes the entity to not meet the standard. Then, I can see his method being plausible, but not practical from an operational standpoint. Even then, it's not very common with it is individuals going into business together.

I though s-Corp is an entity, where LLC could elect the tax status? Doesn't LLC have to have LLC in the name and s-Corp must be Inc. ?

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I though s-Corp is an entity, where LLC could elect the tax status? Doesn't LLC have to have LLC in the name and s-Corp must be Inc. ?

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No, an LLC defaults as a partnership tax election, but can elect to be taxed as an S-Corp (if it meets the requirements) or as a C-Corp. S-Corp and C-Corp are tax elections of an LLC only; it is not a legal entity type.

The LLC, regardless of tax election, must have LLC or Limited Liability Company in the official legal name filed with the Secretary of State. If they wish to operate under a different name from that that is filed with the State, they must file an Assumed Name Cert with SoS and in the county in which they are principally located.

https://www.sba.gov/blogs/better-choice-entity-selection-llc-or-s-corporation

The wording on this website makes it seem like s-Corp is different than an LLC, and more than a tax election of an LLC. Most everywhere I read makes them out as different entities but LLCs can choose s-Corp taxation not vice versa? What am I missing?

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Is there an advantage over the LLC structure owned by s-corps instead of having the business just be an s-Corp owned by the partners? All I can see is that the LLC income gets passed to the s-corps where it becomes dividend instead of regular income?

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Not lawyer/CPA, but it could be in case you can't/won't qualify for the S-Corp selection in a LLC. it looks like the following must be true for this election:

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It must be a U.S. corporation.

It must have no more than 100 shareholders. However, all members of a family are counted as a single shareholder. Spouses are also counted as a single shareholder.

Its shareholders can only be individuals, certain trusts, and estates; they may not be partnerships, corporations or non-resident aliens.

It can have only one class of stock. But, it can have voting and non-voting stock within that single class of stock.

Certain financial institutions, insurance companies, and domestic international sales corporations are ineligible.

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https://www.sba.gov/blogs/better-choice-entity-selection-llc-or-s-corporation

The wording on this website makes it seem like s-Corp is different than an LLC, and more than a tax election of an LLC. Most everywhere I read makes them out as different entities but LLCs can choose s-Corp taxation not vice versa? What am I missing?

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Trust me, it is an election available for LLCs and corporations. It is not a legal entity type.

http://www.sos.state.tx.us/corp/businessstructure.shtml

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An "S" corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an "S" corporation by filing an election with the Internal Revenue Service. Please contact the IRS or competent tax counsel regarding the decision to be taxed as an "S" corporation and the requirements for filing the election. This is not a matter with which the Secretary of State may assist.

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https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership

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An LLC is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner's tax return (a disregarded entity). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

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I will reiterate that your friends really should consult a lawyer regarding this.

What diehard posted regarding S-Corp requirements is correct.

I don't mean this to be rude (not trying to be a jerk at all).


Get them to go see an attorney and/or a CPA. This doesn't seem to be your area of expertise and when it comes to setting up legal and taxation entities, you want it done right or you can create some pretty big headaches/liabilities down the road. The cost of the professional (in this case) is part of the initial cost of doing business and just goes with the territory (and relatively speaking, it won't be that expensive).

Thanks everyone. I know I'm ignorant that's why I posed the questions. I appreciate the explainations to the novice questions. The paperwork will be reviewed by a lawyer. There is a first time for everything, this is a learning process for everyone involved.

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Thanks everyone. I know I'm ignorant that's why I posed the questions. I appreciate the explainations to the novice questions. The paperwork will be reviewed by a lawyer. There is a first time for everything, this is a learning process for everyone involved.

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As a lawyer that does these types of things, just have them draft the original paperwork rather than review your's. It'll be faster and cheaper in the long run.

Thanks!

What is a fair price to draft LLC paperwork?

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Thanks!

What is a fair price to draft LLC paperwork?

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Depends on the complexity and location and the lawyer. You can email me at thewonderer08 at gmail to discuss further f you'd like. I don't typically post my charges online as it is really dependent on each individual situation.

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Thanks!

What is a fair price to draft LLC paperwork?

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Depends on the complexity and location and the lawyer. You can email me at thewonderer08 at gmail to discuss further f you'd like. I don't typically post my charges online as it is really dependent on each individual situation.

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I'd say its not the LLC paperwork, it is the LLC operating agreement that creates the cost and is the most important thing you need the lawyer to help you with -
this document details how the 3 owners will operate - who's in charge - who and how do they borrow money, buy assets, divide profits and all those regular daily things but the most important part of the document details how they unwind the entity - how do you buy out one of the other owners, what happens if one of them dies or gets divorced - those and other unique situations need to be talked about and agreed to up front in the operating agreement

family actually makes that harder to detail - actual situation I've seen - what if the 2 family members are Mother and daughter-in-law - DIL has an affair and divorces son - kind of makes it hard for the business to not deal with that situation if it happens

To me, the "paperwork" is the documents that dictate the operation of the company. I use it as a generic term that is more that just the form 205.

The emoji was unintentional.

I have an LLC, 50% owned by a corporation with an S-Corp election. I am not an expert, but each year, the more I read and ooerate, the more I believe it is a good structure.

Below is my understanding (I am an engineer), so, take it with a grain of salt.

LLC's allow for profit sharing arrangements that are not required to follow the percent ownership of the LLC (unlike a corporation). This is really useful early on in a company where cash flow is a challenge and some owners put more effort into the company than others and salaries are not paid (i.e. profit / losses can be passed up to each S-Corp in any percentage). If you are an LLC and elect to be taxed as an S-Corp instead of a partnership, you may be required to distribute profits / losses according to ownership percentage.

LLC's owners are typically members and not necessarily employees which can be handy. By having an S-Corp own the LLC, each individual can be an employee of their own S-Corp (corporations really want everyone to be employees) and pay themselves a salary of their choosing subject to IRS scrutiny (i.e you have to be considered an employee somewhere unless passive else you bypass paying social security which is frowned upon).

LLC's can be tricky when treating members as guaranteed salary employees if they can not fund the guarantee.

Working age kids of owners can easily be employed by an LLC, it gets a little stickier for an S-Corp as it is a bit more strict.

S-Corps are able to take advantage of many of the same benefits of being a corporation while not paying corporate taxes like a C-Corp.

Both are pass thru entities and do not pay taxes. The federal returns (1065 and 1120S) are information returns since neither are tax paying entities. K-1's detailing profit / loss are passed to the owning entity then to the individual.

S-Corps being a corporation, issue and value stock. This can be daunting if you are doing this yourself and are not an accountant. Balance sheets are required over a certain revenue amount.

S-Corp requires annual meetings / minutes.

The S-Corp allows me to personally pursue other unrelated financial opportunities independent of the LLC such as consulting.

I do not find the returns and reporting of a tiered structure to be that onerous, however, I do have enough family guidance in the form of a business lawyer and multiple CPA's to get me thru the heavy accounting and tax issues.

I do not think it matters as far as paying helpers. Either entity type is subject to the same scrutiny over whether hired help is considered a contractor or employee.

I do not think changing the entity type or tax election later is simple or clear cut, so be careful with that advice.

I believe the filing fee is $300 per entity in Texas. Note... the form is simple to fill out. The articles of incorporation / formation are a binder of legal documents defining relationships that are not filed with the state of Texas. This binder is why some may choose to pay a lawyer an additional $500-$1000 to understand the exact details of the operating agreement and customize standard documents to a particular situation.

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I have an LLC, 50% owned by a corporation with an S-Corp election. I am not an expert, but each year, the more I read and ooerate, the more I believe it is a good structure.

Below is my understanding (I am an engineer), so, take it with a grain of salt.

LLC's allow for profit sharing arrangements that are not required to follow the percent ownership of the LLC (unlike a corporation). This is really useful early on in a company where cash flow is a challenge and some owners put more effort into the company than others and salaries are not paid (i.e. profit / losses can be passed up to each S-Corp in any percentage). If you are an LLC and elect to be taxed as an S-Corp instead of a partnership, you may be required to distribute profits / losses according to ownership percentage.

The Operating/Company Agreement determines the distribution ratio of profits and allocation of losses per agreement by the Members. If the document is silent on the matter, then the allocations are based on the language of the TBOC.

LLC's owners are typically members and not necessarily employees which can be handy. By having an S-Corp own the LLC, each individual can be an employee of their own S-Corp (corporations really want everyone to be employees) and pay themselves a salary of their choosing subject to IRS scrutiny (i.e you have to be considered an employee somewhere unless passive else you bypass paying social security which is frowned upon).

LLCs are owned by Members.

LLC's can be tricky when treating members as guaranteed salary employees if they can not fund the guarantee.

Working age kids of owners can easily be employed by an LLC, it gets a little stickier for an S-Corp as it is a bit more strict.

No it's not.

S-Corps are able to take advantage of many of the same benefits of being a corporation while not paying corporate taxes like a C-Corp.

The tax advantage (because S-Corp is a tax election only) is that the LLC is not treated as a partnership when owned by two or more people or as a disregarded entity if a single-member and the profits that are distributed are not taxed at standard income levels as the would be if taxed as a partnership or treated as a disregarded entity.

Entities taxed as a C-Corp pay taxes on profits and then the Members (LLC)/Shareholders (corp.) pay taxes on the profits distributed to them. This a double-dip taxation system.

Both are pass thru entities and do not pay taxes. The federal returns (1065 and 1120S) are information returns since neither are tax paying entities. K-1's detailing profit / loss are passed to the owning entity then to the individual.

K1s are supplied to all owning individuals (LLCs cannot be owned by a non-person and receive S-Corp election status).

S-Corps being a corporation, issue and value stock. This can be daunting if you are doing this yourself and are not an accountant. Balance sheets are required over a certain revenue amount.

S-Corps are not legal entities and an LLC electing such status is not required to issue and value stock. Corporations are required to do this regardless of whether they are taxed as C-Corps or S-Corps.

S-Corp requires annual meetings / minutes.

S-Corps are not legal entities and LLCs are required to hold annual meetings per the TBOC.

The S-Corp allows me to personally pursue other unrelated financial opportunities independent of the LLC such as consulting.

???

I do not find the returns and reporting of a tiered structure to be that onerous, however, I do have enough family guidance in the form of a business lawyer and multiple CPA's to get me thru the heavy accounting and tax issues.

I do not think it matters as far as paying helpers. Either entity type is subject to the same scrutiny over whether hired help is considered a contractor or employee.

IRS standards dictate W2/1099 status. Any entity or individual may hire another individual and are subject to applicable taxes should they choose W2 status.

I do not think changing the entity type or tax election later is simple or clear cut, so be careful with that advice.

It's filing a form with the IRS for the tax election. Just pay attention to filing deadlines. To change the type of entity (LLC to corp., LP to LLP, corp. to LLC, etc.) is not clear cut and takes a lawyer who really knows the TBOC and all subsets of acts and laws.

I believe the filing fee is $300 per entity in Texas. Note... the form is simple to fill out. The articles of incorporation / formation are a binder of legal documents defining relationships that are not filed with the state of Texas. This binder is why some may choose to pay a lawyer an additional $500-$1000 to understand the exact details of the operating agreement and customize standard documents to a particular situation.

Correct, it is a $300 filing fee for Form 205. No Company Agreement is standard when the LLC is not single-member entity. They all contain boilerplate language, but when multiple people and money are involved, nothing is standard. This is why it is highly recommended to have a lawyer draft your documents because, as your can see from this thread, these relationships and laws are not the easiest to understand.

Pay a professional a little on the front end to do it correctly, or pay a professional a lot on the back to fix your mistakes.

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I'm not trying to be critical, but a lot of the above is incorrect in the manner in which it is stated. S-Corps are tax elections only and not a legal entity. You cannot form an entity in the State of Texas that is an "S-Corp".

The nuts and bolts of all of this is that a LLC with an S-Corp election is operated exactly as any other LLC under the TBOC, but treated as a S-Corp for taxation purposes only.

I am just going to pipe in to say that an LLC taxed as a partnership as the operating entity will be best for actual partners. I am not a fan of the S-Corporations with multiple partners because you must treat everyone the same with respect to their ownership percentage. Example: if Partner A wants to take out 5k as a distribution, so must partner B and C. an LLC taxed as a partnership allows for unequal distributions.

However, if you want to hold that LLC interest in an entity taxed as an S-Corp, that can accomplish several things that would be beneficial for tax purposes.

As I mentioned, I am not an expert although I have learned a lot over the last 13 years of business ownership.

1. There are many ways to accomplish setting up businesses. The person who set up my companies is a 30+ year CPA and attorney from the two top universities in this state...with highest honors... Others who provide assistance in my business are a tax CPA with a masters and CPA / executive level type with 30+ years in public accounting... currently for a $40B company... both consultants from the two best universities in the state of Texas.

2. My upper entity is incorporated in the state of Texas taxed as an S-Corp. My lower entity is an LLC with a partnership election.

3. Yes, a Corp making an S-Corp tax election can own a percentage up to 100% of an LLC. But not the other way around.

4. Yes, there are benefits for working age children applicable to an LLC that are not applicable to an S-Corp related to social security. There can be good reasons to ensure a child is employed by an LLC rather than the corporation that is taxed as an s-corp in multi-tiered companies.

5. Most important... I would suggest finding someone who is straight forward who makes things as simple as possible and listens to their customer. Anyone constantly picking things apart trying to discredit others is not the person you want helping. You want someone who is knowlegeable about all sorts of business arrangements and tiered structures and not talk down to you, but instead patiently listen with open ears.

I posted on this thread because I interpreted the OP as my exact situation. I would be interested in the book that you referenced that recommends this tiering structure as I love to learn everything I can from experts who have implemented.

I can assure you I do have a corporation in the state of Texas with an S-Corp tax election. I also can assure you that this corporation taxed as an s corp does own 50% of a multi-member LLC taxed as a partnership and does indeed have stock certificates.

A lot of what is stated in my original post is actually very accurate. The biggest misunderstanding would seem to stem from the fact that I have 2 companies in a tiered arrangement, while most of the "corrections" are based on the following incorrect assumptions that:

I have a single company

I set up my own company

That I don't understand the difference between State of Texas business entities and federal tax elections.

For the original OP...

Replace the words "S-Corp" with "Corporation with S-Corp tax election"

owning a

Replace the words "LLC" with "Multi-member LLC taxed as a Partnership" and I think this would accurately describe a legitimate business structure.

These two tax elections are compatible because they are both pass thru entities.

Symantics are important here to avoid confusion.

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Symantics are important here to avoid confusion.

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This was my main point I was trying to make. Proper terminology helps prevent confusion in what is already a confusing scenario to those that aren't as versed in the corporate legal structures.

Agreed.

The book is "The Tax and Legal Playbook" by Mark J Kohler

https://www.amazon.com/gp/product/159918561X/ref=as_li_tl?ie=UTF8&tag=optionsmcom-20&camp=1789&creative=9325&linkCode=as2&creativeASIN=159918561X&linkId=0c0ab23db43b08a87db07b955f37df7e

There are some other tax complexities I have uncovered so we are going to find a good CPA and lawyer.

Thanks again all this thread has been helpful.