Comment by maratd | Hacker News Reader

Comment by maratd | Hacker News Reader

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> 1. You definitely don't need to form an LLC. I'm still a sole proprietor all this time and it's working out fine.

I did this for a while, but it starts to hurt around tax season. There are advantages to being incorporated and then hiring yourself as an employee for a minimal wage. With the way you're doing it, you're paying employment taxes on your entire income. With an LLC, you can pass the majority of it through without paying that.

> 2. Personally, I'd hold back 35%+ of your income for taxes and expect to pay taxes every quarter.

That would be the responsible thing to do. I just end up paying yearly, paying the interest penalty, and using January+February+March for taxes. Probably should get my house in order at some point.

> 3. 2 months of savings seems really low.

Agreed.

> 4. Billing style really depends on the job you're doing. A lot of my work is billed hourly due to the nature of what I'm asked to do.

Yes, but I do pretty much everything I'm able to not bill hourly. Fixed Budget > Monthly Rate > Bi-Weekly Rate > Weekly Rate > Daily Rate > Hourly.

> I did this for a while, but it starts to hurt around tax season. There are advantages to being incorporated and then hiring yourself as an employee for a minimal wage. With the way you're doing it, you're paying employment taxes on your entire income. With an LLC, you can pass the majority of it through without paying that.

I'm not exactly sure what you mean by this, but LLCs are pass through entities for tax purposes. That means your tax treatment is the same for an LLC as it would be if you were a sole proprietor without an LLC.

The reason to create an LLC is to separate your personal assets from your business assets and to protect you from liability for your employees actions. If your LLC signs the contract, in most cases the client can only go after the business, not you personally.

However, almost all lenders require a personal guarantee and an LLC doesn't protect you from your own negligence. Only from the negligence of your employees.

So basically - LLCs are unnecessary if you are the only employee.

See: https://www.nolo.com/legal-encyclopedia/limited-liability-pr...

The tax benefits come from electing to be treated as an S corp for tax purposes, not from establishing an LLC per se. But as far as I'm aware, you need to establish an LLC or other corporate entity in order to be taxed as an S corp.

It's true that creditors can come after your personal assets if you personally guarantee a corporate entity's debt. But establishing an LLC does limit your personal liability in any instance where you don't provide a personal guarantee. I suspect that many individual freelancers who establish LLCs never take on debt or other liabilities that require personal guarantees.

> So basically - LLCs are unnecessary if you are the only employee.

This is not true for many reasons, primary among them being taxes and healthcare.

I'll explain taxes below. For healthcare, I use Trinet as an HR provider (since I am a company) and they allow me to get benefits (including healthcare) at corporate rates. You need to be incorporated for them to even talk to you.

> I'm not exactly sure what you mean by this, but LLCs are pass through entities for tax purposes.

Happy to explain. When you are self-employed, you pay SECA taxes on your entire income.

https://www.investopedia.com/terms/f/fica.asp

For self-employed, that means both the employer and the employee portion. Let's say you pull in 300k. You're going to pay SECA taxes on all of that.

If I create an LLC, do an S-corp election, then retain myself in the LLC for say 50k, I will only pay those taxes on the 50k. The other 250k will be passed through to my personal income and I will only be responsible for the standard income taxes.

Please correct me if I'm wrong, also I assume you are in the US...

    I did this for a while, but it starts to hurt around tax season. There are advantages
    to being incorporated and then hiring yourself as an employee for a minimal wage. With
    the way you're doing it, you're paying employment taxes on your entire income. With an
    LLC, you can pass the majority of it through without paying that.

So you are paying corporate tax rate on the profits of the company, then personal tax rate on your "minimal wage". How does the money from the company get passed to you without any tax hits?

He's likely an llc taxed as an S-Corp. You don't pay taxes out of your business, profits after write offs are added to your return with a K1. You're likely thinking of a C-Corp.

Yes, that's exactly it. As an S-Corp the corporation doesn't pay any taxes. Well, in my case my state (New Jersey), has a minimum tax based on revenue. I pay that, but it's minimal. If it really bothered me, I could re-incorporate as a Delaware or similar LLC. All profits are passed to your individual return and you pay taxes on that.

With the K1, you will be adding the passed through income to your personal income and still paying tax on it. I'm not seeing the benefit of an S-Corp here.

See my comment here: https://news.ycombinator.com/item?id=19527078

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