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I'm 27 and have started a sole-proprietorship alongside my day job. It is a computer consulting company, basically contracting with someone to do his technical work. I have a few people who do the work for me, and I pay them. So, from my simplistic point of view, I send an invoice, get paid, receive an invoice from my "subcontractor" and pay him/her. The company is set up as a sole-proprietorship (filing a schedule C at the end of the year), and I have a couple of questions with regards to taxes and transfers between the company's income and my personal expenses.

As the company becomes more and more profitable, I have the money sitting in a checking account. I would like to use that money for personal use, basically receiving "pay." I don't want to pay myself a wage, since it seems like that would double the taxes paid on this money. I've been thinking of starting an investment account for the company, I noticed that Ameritrade will let you start a sole-proprietorship account.

Or, can I simply take this as income for myself straight out, being taxed with the Schedule C, rather than the standard income tax?

My big problem is that I'm not even sure where to start looking for information about my current situation. If someone could point me to a place to start and a place to continue my learning.

Thanks,
-Corey Haines
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Or, can I simply take this as income for myself straight out, being taxed with the Schedule C, rather than the standard income tax?

My big problem is that I'm not even sure where to start looking for information about my current situation. If someone could point me to a place to start and a place to continue my learning.


Corey,
As a sole proprietorship, the money you make is taxed as income. It doesn't matter if you pay yourself or not, the income above your expenses is taxable. I suggest you check out our tax area: http://www.fool.com/taxes/taxes.htm

You also may want to discuss incorporation with an accountant. Since you have a few people working for you, this may be worth looking into for a number of legal and tax reasons. Also, if you have people working for you, there is the issue of whether they should be considered employees, or subcontractors. Also, money you pay to subcontractors must be reported to the IRS on a form 1099 if it's over a certain amount.

Just from seeing what you posted, it sounds like you are doing quite well. It may be worth the money to have a consultation with an accountant now to save you big tax issues later.

George
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Hi Corey
You may wish to look at becoming a Sub-S Corporation in which some of these profits could come over to you without employment taxes (Social Security and Medicare). With the rate being 15.3% on just $10,000 you may be able to keep $1,530 or on $20,000 $3,060 if the Sub-S is properly placed. The reason I bring this up is your age, at 27 you may get to use this invest $$'s for 40 years. A trip to your accountant is worth the few bucks.
sameally
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You may wish to look at becoming a Sub-S Corporation in which some of these profits could come over to you without employment taxes (Social Security and Medicare).

Actually, the LLC is considered the best vehicle since you can have it taxed as a sole proprietorship, a S corp or a C corp. There is less paperwork compared to a corporation. However, you have to be careful as to which state since some like California and Oregon have quirks you have to watch out for since they can cost you additional money. A qualified tax professional should be able to assist you in making an informed decision as to which vehicle is best for you.
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A couple answers to questions:

1) I consider the people working for me subcontractors, rather than employees, as they invoice me from their companies (sole-proprietorships, of course). I do plan on providing them with 1099 forms.

2) I considered incorporating, but, after speaking to an accountant (at my day job), decided that the main benefit of it was a legal umbrella against lawsuits, and, since I'm currently doing work for only one person and have no major belongings (the only thing I own is a car), it was easier to simply stay in the current situation.

I will take your advice to consult an accountant now that I've made some profits. As usual, the TMF boards have come through with intelligent answers from people. Thanks!

-Corey Haines
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Roocat
There are disadvantages to both LLC and Sub-S, in the case of the LLC you must have two members in the Sub-S one will do. Employment taxes was the only issue I pointed out (Social Security) and in this case the business owner had other members doing part or maybe most of the work, the Sub-S allows the transfer of Profits to the Stockholders return without the payment of Employment Taxes and by-passing Corporate Taxing as well as the LLC, but in this case the LLC would impose the owner to Employment taxes (Social Security) at the given rate of 15.3%.

Some other disadvantages of the LLC may be the limit of life under some States laws, 50% sell off or exchanged within 12 months the LLC will terminate for federal tax purposes, cannot issue 1244 stock, may not be permitted to operate in more than one State, Some States tax LLCs, and many others.

Its just one area thats not cut and dry.

sameally
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in the case of the LLC you must have two members

Not in all states. Most recognize a one member LLC. LLCs may be taxed as S corps, sole proprietorships or as C corps. In the S corp form, you can bypass the payroll tax issue as in the S corp.
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2) I considered incorporating, but, after speaking to an accountant (at my day job), decided that the main benefit of it was a legal umbrella against lawsuits, and, since I'm currently doing work for only one person and have no major belongings (the only thing I own is a car), it was easier to simply stay in the current situation.

Having nothing is not sufficient protection against a lawsuit. True, it might discourage someone from bringing suit, but if a judgement is given against you then that stands against you for something like 20 years.
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<<2) I considered incorporating, but, after speaking to an accountant (at my day job), decided that the main benefit of it was a legal umbrella against lawsuits, and, since I'm currently doing work for only one person and have no major belongings (the only thing I own is a car), it was easier to simply stay in the current situation.

Having nothing is not sufficient protection against a lawsuit. True, it might discourage someone from bringing suit, but if a judgement is given against you then that stands against you for something like 20 years. >>


Being incorporated isn't much of a protection against being sued if you are doing your own work. As a self employed furnace repairman, I've kept my sole proprietorship because it's simple and cheap, and because if I screw up and injure someone, they would simply include me as a defendant in a lawsuit if I incorporated. The person doing a job negligently can always be sued, whether they are an employee or the owner.

So I buy liability insurance.



Seattle Pioneer
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True, it might discourage someone from bringing suit, but if a judgement is given against you then that stands against you for something like 20 years.

Actually a judgment is good for 5 years and 6 months but can be renewed before the end of the 6 months for another 5 years and 6 months but I do not know if there is a certain number of 5 year terms that you can renew it for. Usually, after it is renewed once, most judgments seem not to be pursued but that is still 10 years.
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