QUESTION.
My husband and I are in the process of starting a bakery and cafe. We have a solid business plan, are engaged with a number of banks who seem willing to provide a range of financing. We are buying a building. Our immediate questions arise around what business formation type should we set up. An LLC? An s-corp? Or what? We are hearing that we may NOT be well served by the s-corp, and that we may need two LLCs – one for building and one for business. At this point we need guidance and some definitive answers (which we have not been able to find on the Net). Please help.
ANSWER.
A few years ago NJ enacted a law that required all NJ corporations to file a tax return and pay a minimum of $550 a year IN TAX regardless of extent of income earned. Therefore, it is not a particularly good idea for a small business owner in NJ to form a corporation if it is not required. An LLC is the alternative of choice to a corporation, and I don’t know of a special tax on them. But there might be? You have to check with NJ taxing authorities. While you are checking, see if you can form an LLC in NJ and “check the box” for Federal Income Tax purposes to be taxed as a corporation. Let me know if an LLC in NJ that is taxed as a corporation gets hit with the $550 a year tax by NJ. I don’t know how the law is written – does it apply only to entities that are registered in NJ as a corporation – or does it apply to any entity that files a NJ corporate tax return?
If the tax applies, then form two LLCs – one for your bakery and one to own you real estate. You will have the choice of forming single-member LLCs or multi-member LLCs when you form them. Single member LLCs are easier to handle since their revenues and expenses simply flow through to the owner’s Form 1040 tax return at year end. Only one tax return would have to be filed. But if you form multi-member LLCs owned by you and your husband each, then for each LLC you will have to file a Form 1065 partnership tax return at year end. My advice is to form an LLC owned by your husband and an LLC owned by you so no partnership returns have to be filed.
You will be less likely to get audited by the IRS if you form a corporation to own both of your LLCs because in that case you would not be filling out a Schedule C on your Form 1040. If you did, then all your salary expenses, healthcare insurance expenses, etc would be paid to you or for you through the corporation and would be fully tax deductible. Maybe the minimum $550 a year in tax would not be a concern. Your problem will arise if you start having losses or you fold. You will have to dissolve the corporation to avoid getting hit for $550 a year. Instead of forming the umbrella entity as a corporation I would recommend that you simply form a third LLC that owns the other two LLCs and check the box for tax purposes to have it taxed as a corporation. For tax purposes you get all the benefits of being a corporation and won’t likely get hit with an audit. However, all of your LLCs’ revenues and expenses will flow into your corporate tax return. And your umbrella LLC will have to issue you and the hub W-2s. Make sure at year end you give yourselves a bonus so “corporate income” is zeroed out. Otherwise what you leave in the umbrella will be subject to double tax when you distribute it as a dividend.
Consider taking a look at the following book:
Structuring Your Business
By: Michele Cagan
(c) 2004
ISBN: 1593371777
See also, CHOICE OF LEGAL ENTITY.
I think I have answered your question. Good luck! Regards, -Jeff
Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
www.scoreprinceton.org
www.jlippin.com
