What are the problems with an LLC as a professional?

brazilio · #1 04-17-2006, 01:33 AM

Since taxes for most of us are done for last year, I got to thinking about becoming an LLC again when I file my poker taxes for the next year. I currently am a part-owner in a construction LLC that does mostly federal contracting. The actual LLC creation was relatively simple, although I was present and paying attention to only parts of it. Deduction-wise vs filing as a pro there have to be significant advantages.

A few months ago a guy in here asked a similar question, and if I remember correctly a CPA-type said it was improbable that the IRS would allow it, or it would be an audit-magnet for the business deductions you'd naturally try to take.
I don't remember the exact details of the reasoning why it would be a good or bad idea.

Anybody?

AAAA · #2 04-17-2006, 01:45 AM

check the legislation forum...they may have some ideas too.

kahntrutahn · #3 04-17-2006, 05:16 AM

My CPA had me start an LLC... State of LA. I go blindly by his suggestions as he and his firms signatures are on my returns and his ass is on the line too. *shrug*

VayaConDios · #4 04-17-2006, 11:26 AM

[ QUOTE ]
My CPA had me start an LLC... State of LA. I go blindly by his suggestions as he and his firms signatures are on my returns and his ass is on the line too. *shrug*

[/ QUOTE ]

Your CPA doesn't know what he's doing. A single-member LLC is a non-entity for federal tax purposes. In other words, you'll be taxed exactly as if you were a sole proprietorship.

TRBNGR · #5 04-17-2006, 12:09 PM

[ QUOTE ]
A single-member LLC is a non-entity for federal tax purposes. In other words, you'll be taxed exactly as if you were a sole proprietorship.

[/ QUOTE ]

I do not believe this to be correct. It is definetly a taxable entity. It sounds like your describing what happens if they 'pierce the veil' of the LLC. The most common reasons for that to occur would be undercapitalization and not following proper procedures (not having meeting, not filing reports, etc). A single member can be treated like a LP for tax purposes. I'd really like to hear others take on this though.

VayaConDios · #6 04-17-2006, 12:52 PM

[ QUOTE ]
[ QUOTE ]
A single-member LLC is a non-entity for federal tax purposes. In other words, you'll be taxed exactly as if you were a sole proprietorship.

[/ QUOTE ]

I do not believe this to be correct. It is definetly a taxable entity. It sounds like your describing what happens if they 'pierce the veil' of the LLC. The most common reasons for that to occur would be undercapitalization and not following proper procedures (not having meeting, not filing reports, etc). A single member can be treated like a LP for tax purposes. I'd really like to hear others take on this though.

[/ QUOTE ]

This is very true; pursuant to Treasury Regulation § 301.7701-1,-2,-3, single-member LLCs are, by default, disregarded entities. However, such an entity may, by filing Form 8832, elect to be taxed at the federal level as a corporation.

What I don't know is whether this single-member LLC can then make a an S-election. My best guess is no, it can't, but I'll look into it.

And thanks for the tutorial on piercing the veil. I don't know why I bothered with law school with all the info that is given away here for free.

brazilio · #7 04-17-2006, 02:46 PM

Ok so as a single entity it probably wouldn't work out. However, I have a number of guys who would likely be willing to join in an LLC in a partnership, and both parties would be willing to go percentages on profits. I knew that LLCs were essentially non-entities when it was just a single owner. I'm also assuming that only paying taxes on a working wage deemed as reasonable by the IRS is pretty much impossible if only because of the business we're in, and there being no previous precedent nor any real metric they could use.

If there are more than 1 of us assuming we're of equal competence, there are going to be a number of benefits as I see it.

Less tilt: While playing staked almost everybody plays a much better game.
Less variance: Assuming we're of roughly equal skill and playing time our combined income stream will be more moderate.
Additional SEP-IRA contributions.

Also of course we're going to have a number of business deductions.

ChipLeeder · #8 04-18-2006, 12:17 AM

A single member LLC can elect to be a Corporation via Form 8832 like you stated and can also elect to be an S Corporation (Form 8832 + S Election.)

Absent any elections, a single member LLC is a nonentity.

It cannnot be an LP (limited partnership), because by definition a partnership requires more then one partner.

DeathDonkey · #9 04-17-2006, 06:48 AM

I spoke with a tax attorney about this exact topic and he thought it was not possible to create a US based company (ie: me) to play poker on the internet on overseas servers since it is quasi-legal at best. He said it would have a better chance if I was a completely live player but even then there were issues.

-DeathDonkey

VayaConDios · #10 04-17-2006, 11:28 AM

[ QUOTE ]
I spoke with a tax attorney about this exact topic and he thought it was not possible to create a US based company (ie: me) to play poker on the internet on overseas servers since it is quasi-legal at best. He said it would have a better chance if I was a completely live player but even then there were issues.

-DeathDonkey

[/ QUOTE ]

This is the same reservation that I have had about incorporating and making a subchapter S election.