Under the new tax bill just passed by Congress, Pass-through Entities offer a generous tax break for independent workers and entrepreneurs. Are you an independent worker getting a 1099 instead of a W-2? Do you get paid individually or do you have a LLC that gets the checks? If the former is true, then you may not have been taking advantage of tax breaks that could of accrued to you. The new tax bill now offers even greater incentive for good structuring and tax planning. The new tax law (unless modified) will offer a maximum 29% tax rate instead of the current 39.6% tax rate; in order to take advantage of this, you have to form an entity and get paid through that entity. This makes sense anyway for balance sheet building and tax deductions with or without the new tax break.
To put ice cream on top of the cake you might consider structuring the LLC as a Family LLC Consider these benefits;
- A LLC can shield you from liability in the event of a lawsuit
- A LLC offers you the opportunity to deduct business expenses such as automobile costs, office space in your house, lunches, clothing, etc.
- Profits in an LLC gives you the opportunity to value your business rather than just earn a large compensation as a 1099 service provider. To clarify, suppose you earn $120,000 a year providing computer services to a major company. The $120,000 compensation does nothing for your balance other than savings if any. Now suppose you form an LLC and let the LLC offer the services and you draw out $70,000 a year and allow the LLC to make a profit of $50,000 per year. The LLC market value at a 20% cap rate is $250,000. If you accept the funds as an individual you would only get a $50,000 balance sheet credit which is not capitalized.
- Income from the LLC offers a pass through tax rate of 29% versus a 39.6% tax rate as an individual.
- A LLC can shield you from being sued and assets confiscated. Your children can own all or the huge majority of the membership interest and you can have a Participating Promissory Note and take a % of the cash flow.
- The LLC offers you flexibility when selling the business or asset. You can sell the membership interest OR the asset.
Now consider the added benefits of making it a family owned LLC. Suppose you have 2 children ages 4, 15 and say 17 and they help you in the business. Your 4 years old appears in commercials promoting your business and you teenagers actually help out with social media marketing copying and packaging and delivering the deals, etc. Say they each own 20% and you own 40%. The profits mentioned above would be allocated $10,000 to each of them and $20,000 to you. You will save tons of taxes because they are in a much lower tax bracket than you. If that is their only income there should be no taxes payable by them whatsoever while you will have to pay 29% of whatever you get.