LLCs v. S Corporations: Which One Is Better For Your Business

Most people are familiar with limited liability companies (LLCs) but few are aware of S corporations. Depending on the nature and structure of your business, an S Corporation could be a better choice of business entity than an LLC. Generally, S corporations are corporations that elect to pass the corporation’s income or losses to its shareholders and do not pay any federal income taxes. In order to receive this tax benefit, the corporation must make a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. The S status combines the legal benefits of C corporations with the tax benefits of partnerships. The advantages and disadvantages of S corporations and LLCs will be discussed below for your benefit.

Advantages of S Corporations over Limited Liability Companies

1.    Employee Status. S shareholders are regarded as employees of S corporations while members (i.e. partners) are not regarded as employees of an LLC. This means that certain income of LLC members is subject to the self-employment tax. Owners in an S corporation do not pay this tax or the payroll tax. This is a huge benefit that S corporations have over LLCs.

2.    Fringe Benefits. Certain fringe benefits, such as health insurance, can not be excluded from an LLC member’s income but are excluded from the income of an S shareholder who owns 2% or less in an S corporation

3.    Income Shifting to Family Members. S corporation profits can be shifted to family members by making gifts of stock to the members. The family partnership rules make it more difficult to shift income to family members through an LLC.

Advantages of Limited Liability Companies over S Corporations

1.    Profit and Loss Sharing. LLC profits and losses are allocated to the LLC members based on a profit sharing agreement. This gives an LLC more flexibility as to how much of the income and losses each LLC member reports. S Corporations do not have this benefit, as their profits and losses are allocated pro rata based on stock ownership.

2.    Eligibility of Owners. With LLCs, there is no ownership restriction. However with S corporations, there can be no more than 100 shareholders and ownership is restricted to individuals, estates and certain trusts. Nonresident aliens are not permitted to be owners of S corporations.

3.    Deductibility of Losses. The deductibility of entity losses is limited by the at-risk basis of an LLC member or S shareholder in the entity. The at-risk basis of an LLC is usually larger than of an S corporation because debt can be used in LLCs to raise the limit on the deductibility of losses. This means that LLC members can potentially deduct higher losses from their taxable income than S shareholders.

Owe the IRS? Major Settlement Changes Announced

The IRS has recently announced some major changes that will make it easier for people with unpaid tax debt to resolve it with the government. The IRS uses a settlement program called an Offer In Compromise to adjust unpaid tax debts. The idea of cheap resolution for outstanding tax debts has long been more promise than reality. However, with these recent changes, it could result in many more successful settlements.

The change with the largest impact will likely be the method the IRS uses to calculate future income. The IRS uses a tabulation method to evaluate a settlement offer, provided there is no misconduct involved. The IRS will generally accept a settlement of tax debt when offered the net liquidation value of the taxpayer’s assets and the net present value of the taxpayer’s future disposable income. The IRS has just changed how it calculates future income to make it easier on the taxpayer.

The taxpayer’s disposable income must first be determined to come up with the amount of future income that must be paid as part of a tax settlement. Disposable income is calculated by deducting standard living expenses from net income received by the taxpayer. The IRS determines the amount for standard living expenses from the Bureau of Labor Statistics.

Prior to this, some major potential expenses were disallowed such as student loan payments for college. However, the IRS will now allow the deduction of payments for all government guaranteed student loans used to pay for any education after high school. This will be a huge relief for taxpayers paying off student loan debts. 

The most significant change in the way in which the government calculates net future income involves the multiplier used to convert monthly disposable income into a settlement payment to the IRS. Now this is going to get a little technical so stay with me. The IRS will accept payment of an accepted settlement in two different ways, lump sum or short-term payments and deferred payment over a period of 24 months. Before the recent change, the IRS multiplied monthly disposable income by 48 to determine its net present value if the payment was to be made within six or fewer months from acceptance. If a 24-month payment period were chosen, the IRS would have multiplied the disposable income by 60 to determine its net present value.

The future income net present value multiplier has been reduced by 36 months in each category. If a settlement is to be paid in cash or within six months, disposable income is multiplied by 12. If a settlement is to be paid over a period of 24 months, disposable income is multiplied by 24. For taxpayers with no home equity and few other assets, this will cut the amount of an acceptable settlement offer to as little as a fourth of the amount that would have previously been required.

There are other changes that affect the way the net value of the taxpayer’s assets is calculated that will be beneficial to many taxpayers, especially families. For example, the IRS will now disregard the first $3,450 of equity in up to two vehicles in calculating asset liquidation value. Moreover, taxpayers can now keep one month’s worth of allowed living expenses in their bank account plus $1,000 without adding to the liquidation value calculation. Again, this will lower the settlement threshold for many taxpayers.

These changes in the Offer in Compromise program standards should prompt a flood of new offers. In addition, many pending settlements that would not have been accepted will now be allowed. This will be a huge relief for many struggling Americans with unpaid tax debt.

Find Out What Information the Government Has On File For You: Submit a FOIA Request Today

The Freedom of Information Act (FOIA) is one of the strongest tools of defense you have against the IRS, and other governmental agencies, but few are aware of it. I will start with a general overview of the Freedom of Information Act for people that are unfamiliar with it. The Freedom of Information Act became a federal law in 1967. Under 5 USC §552, this law gives you the right to access information from the federal government. Generally, it is a great way to keep citizens informed about their government but it can also be used in the event that the IRS decides to conduct an audit on you. As the saying goes, the best offense is a good defense. Many of these audits can be adversarial in nature and it is best to know what the IRS has in your file. Here is more information below if you do decide that you want to submit a FOIA request today.

How To File A FOIA Request?

To file a FOIA request, there are three options:

1.     Fill out the electronic FOIA request form on the Federal Communications Commission website.

2.     Send in the request via mail in a letter. If you choose to send your request this way you must:

a.     Write words “Freedom of Information Act Request” at the top of the letter and on the outside of the mailing envelope;

b.     Date the request;

c.      Give your daytime telephone number or a daytime e-mail address so that the staff can get contact you if they have questions;

d.     Provide as much information as possible regarding each document that you are seeking;

e.     Specify the maximum search fee that you are prepared to spend on the request. Send your letter to the following address:

Federal Communications Commission

445 12^th Street, S.W., Room 1-A836

Washington, D.C. 20554

3.     E-mail your request to FOIA@fcc.gov, or fax it to (202) 418-0521, with the same information required for mail submissions.

Are There Any Fees for FOIA Requests?

Yes. The FCC is allowed to charge for the research and reproduction services. The FOIA request should specify the amount of FOIA fees that you are willing to pay. If the FCC estimates that your search charges are likely to exceed $25, or the limit you set in your FOIA request, then the FCC will notify you of the estimated fee charge prior to doing the search. They will give you the option to revise or clarify the FOIA request.

Are There Any Exemptions or Exclusions to FOIA Requests?

Yes. There are nine exemptions and three exclusions to FOIA requests listed below.

FOIA Exemptions

1. Secret information determined by Executive Order to involve National Defense or Foreign Policy that is classified information.
2. Internal personnel rules or practices of a Federal Agency.
3. Information specifically exempted by statute.
4. Trade secrets, commercial and financial information that is privileged.
5. Inter-agency memoranda or letters that represent the deliberative, pre-decisional process, attorney work product or attorney-client privilege.
6. Personnel and medical files of others that amount to an invasion of personal privacy.
7. Records that are used for law enforcement purposes.
8. Records of financial institutions, such as bank examination records.
9. Geological information and maps concerning oil wells.

FOIA Exclusions

1. Criminal investigations where the IRS is conducting an investigation and the subject under investigation is unaware of it. Disclosure would interfere with enforcement proceedings.
2. Confidential informants.
3. FBI requests regarding foreign intelligence and terrorism.

Self Employed? Should You Be Making Estimated Payments?

Who Should Be Making Estimated Payments?

1.     People who are self-employed.

2.     People whose non-wage income is increasing, or expected to increase, in the current year.

3.     People who have done well on the stock market exchange.

4.     People who have gotten a large inheritance, or other windfall, with assets that produce income.

5.     For business owners receiving wages, if you expect to owe extra taxes, have your tax professional manipulate your payroll tax withholding before year-end. That way, you never have to make estimated payments.

When Should You Be Making Those Payments?

When it comes to estimated payments, the taxpayer should make quarterly payments. However, the definition of quarterly in the tax code can mean two months or four months. It is best to consult a tax professional to answer this question for your particular situation. 

How Much Must You Pay?

Typically, you must only pay estimates if:

1.     You expect to owe $1,000 or more beyond any payroll withholding and;

2.     Your withholding or other tax credits will be less than 90 percent of the tax you expect to owe on your current year tax return. If your income falls into the high-income levels for the year, you must pay 100 percent of what you expect to owe; or

3.     Your withholding or other tax credits will be less than 100 percent of the tax return shown on your prior year’s tax return. If you expect to have losses from the business, don’t worry about making estimated tax payments on the business.

Again, this is meant to be a brief overview on estimated payments. Consult a tax professional for the best advice regarding your particular tax situation.

Do I Still Have to Pay the Ad Valorem Tax for my Car?

I know a lot of you have been hearing misinformation about not having to pay the ad valorem tax on your car anymore so I decided to clear that up any confusion here. First, I’ll clearly explain what the ad valorem tax is for people that may not be familiar with it. Generally, an ad valorem tax is a tax based on the value of real estate or personal property. In Georgia, vehicle owners have to pay a tax before or on their birthday every year. However, Governor Deal signed a new law that has changed how the Georgia Department of Revenue will collect this tax in this future. Below are a few answers to some common questions people have regarding the title fee law.

1. When does the new title fee take effect?

This law goes into effect on March 1, 2013.

2. How does the title fee affect the sales of both new and used cars?

On all cars purchased beginning March 1, 2013, there will be a title fee assessed in lieu of state and local sales taxes and the annual ad valorem tax also known as the birthday tax.

3. Is this tax just for cars bought at dealerships?

No, this title fee applies to both new and used vehicles sold either through a dealer or just a sale between people.

3. How much will this new title fee cost?

The fee starts at 6.5% of the fair market value of the car and increases to 7% in 2015.

4. If a customer buys a vehicle prior to March 1, 2013, can they opt into the new title fee system?

Yes, a customer who purchases a vehicle between January 1, 2012 and February 28, 2013 can opt into the title system between March 1, 2013 and January 1, 2014.

5. What about vehicles currently owned?

Owners of motor vehicles titled prior to March 2013 will continue to pay annual ad valorem taxes until the vehicles are sold or transferred.

Protect Your Brand: Trademarking Your Business

So you’ve worked hard to come up with your business idea, picked your brand name and incorporated your company. Congratulations but you’re not done yet. It is imperative that you apply for trademark protection for your brand. If you don’t trademark your business, you’ve put yourself and your business in a vulnerable position. At any moment, a competitor could swoop in and take your name, your brand identity and everything you’ve worked hard to create.

Benefits of registering a trademark

1.     A Federal trademark registration carries a presumption of ownership and validity of the trademark during the first five years of registration.

2.     A registration can be used offensively to prevent others from adopting and using confusingly similar marks. Companies looking to register their trademarks routinely check the USPTO database for confusingly similar trademark applications and registrations and make decisions to adopt and use new marks based on the information in the database.

3.     The ® is constructive notice to third parties of your trademark rights.

4.     A trademark registration gives the owner nationwide rights in the trademark as of the date of filing the application.

5.     After five years of securing a trademark registration and continuous use of the trademark in commerce, the owner can file an affidavit of incontestability, and the registration becomes conclusive evidence of ownership and validity of the mark. This incontestable status is recognized in Federal courts in the event the owner sues for trademark infringement.

6.     A registration is a valuable commodity and can be the basis of a license to use the mark by third parties.

When to Register a Trademark

Entrepreneurs should carefully select trademarks for their businesses. Trademarks identify the source of goods and services and represent the goodwill and quality of the goods and services. Although the cost of getting a Federal trademark is relatively inexpensive, the costs to defend a trademark infringement lawsuit or to select a new trademark after making a substantial investment in a new product or service can be quite costly. It is better to identify several potential trademarks, order a search report from a reputable search company and then have a qualified attorney assess the risks associated with each potential trademark. Entrepreneurs can also file an Intent-to-Use trademark application, which preserves their rights in the mark as of the filing date of the application.

Risks of Not Registering a Trademark

1.     Other businesses could adopt and use similar trademarks and logos of your business legally.

2.     An entrepreneur could lose the presumptions of ownership and validity that a trademark registration provides.

3.     The business could risk the loss of nationwide rights to the mark and being limited to the area where they do the most business.

4.     A business does not have the right to use the ® symbol without registering the trademark. 

Copyright, Trademark or Service Mark

Copyrights, trademarks and service marks all protect different rights. Copyrights protect the original expressions of an idea in a tangible medium such as a book or sculpture or song. Trademarks protect the name and logo of a company in connection with goods to identify the source of those goods. Service marks are used in connection with the source of a service rather than goods. 

Infringing Competitor

If you find that another business is infringing on your trademark, service mark or copyright, consult an attorney. An attorney is likely to send a cease and desist letter to the offending business to inform them of your rights and request that they stop such use. An attorney may also file an opposition to a trademark application, if necessary and file an action in court to stop any infringing uses.

Life of a Trademark

U.S. trademark registrations last for ten years and are renewed every ten years. However, after the first five years, the trademark owner must file an Affidavit of Use called a Section 8 Affidavit in order to maintain the registration. The fee for this Section 8 Affidavit is currently $100 per class of goods or services, plus the attorney’s fees to prepare and file the Affidavit. Additional fees will apply if the Affidavit is filed late or filed with a Section 15 Affidavit of Incontestability.

10 Ideas For Long-Term Financial Security

1.    Maintain An Emergency Fund. Maintain cash reserves in a highly liquid, money market account for daily needs over a 4-6 month period.

2.    Invest Retirement Funds Based On Time.

·      Short-term (1 Year): Make sure you have enough cash after Social Security and any pension payments to cover two years’ basic expenses. Then split the cash between a money market account and a bond fund with a one-year maturity.

·      Mid-term (3-5 Years): Keep 3-5 years’ basic expenses invested in indexed CDs, which are tied to stock market performance but offer federally blocked principal protection.

·      Long-term (More than 10 Years): Invest everything else in up to 60% equities (lower percentage for lower risk tolerance), with the rest in bonds and alternative investments such as REITS and commodities.

3.    Diversify Investments. Choose to invest in exchange traded funds (ETFs), mutual funds or individual securities in at least a few of the different areas:

·      Asian, African and South American emerging markets

·      U.S. companies with high dividend payouts

·      Treasury Securities

·      Highly-rated corporate bonds

·      Health care industry

·      Energy

·      Consumer staples

·      Commodities

·      REITS (equity, mortgage or hybrid REITS)

4.    Hedge For Tax Hikes. Tax-free or low-tax investments may include:

·      Roth IRAs

·      Tax-Exempt Municipal Bonds

·      Dividend-Paying Stocks

·      High-Growth Stock

·      Vacation Homes

5.    Select ETFs. Exchange traded funds preferred over mutual funds due to:

·      Lower expense ratios

·      Control over capital gains

·      Exchanges similar to stocks

6.    Postpone Social Security Benefits. Individuals who sign up for Social Security benefits beginning at age 62 will lock in a lower benefit for life. However, this may be advisable for individuals who are in poor health, with minor children or in financial trouble. If continuing to work at age 65, individuals should consider delaying Social Security benefits until retirement. Otherwise, those earning more than $13,000 will give up $1 in Social Security benefits for every $2 earned.

7.    Pay Off The Mortgage and Credit Card Balances. Try to pay off the home mortgage before retirement or downsize to a smaller home. Also,  if the credit card balances become unmanageable, consider contacting a credit card counselor.

8.    Weigh Retirement Plan Payout Options. Individuals contemplating retirement who participate in 401(k) or other employer retirement accounts should consider their payout options, including lump-sum payouts, single-life annuities, and joint and survivor annuities.

9.    Consider An Annuity Contract. Individuals who do not have an employer-provided retirement account might consider locking in some financial security by purchasing an annuity contract. An annuity contact is an insurance contract providing a lifetime annuity in exchange for a lump-sum fee.

10.  Prepare or Update An Estate Plan. Estate planning should include:

·      Durable Power of Attorney. Have a durable power of attorney for finances and health care in the event the individual is mentally or physically incapacitated.

·      Living Will. This should specify the level of care for the latter years of your life.

·      Update Beneficiaries. Beneficiaries stipulated in wills, trusts, retirement accounts, bank accounts and investment accounts should be reviewed and updated as needed.

·      Irrevocable Life Insurance Trusts. This type of trust helps the individual avoid estate taxes on life insurance proceeds upon death.