shall I add my husband as a member of LLC?

[aa-0987654321]

I am planning to set up a small business to import some home decoration items to sell on eBay locally in Houston, Texas.

My husband is a full time employee, and I am currently a stay at home mom, so I would be the one who is running the new business. My questions are:

1) Since the first import shipment would cost about USD1800 and I would be selling them online only, I wonder if LLC with S corp election is the best option for us?

2) If I should set up a LLC and elect to be taxed as S corp, shall I add my husband as a member of LLC? in order to maximize the liability protection but minimize tax paid.

Thanks!

[tmerrill]

1) Since you are just starting out, I don't think this should be your top concern. You can always change this election in the future.

2) I would say yes. But, I would get the help of an accountant or tax lawyer so that you set it up in the most legal way. You don't want an audit when your business is just starting.

[aa-0987654321]

Thank you, Tmerrill. Do you think I shall use sole proprietorship or ... instead of LLC? tks.

[Evan]

It won't matter for tax purposes (if you don't make this corporate election right away, which you don't need to make right away). For legal reasons, it'd provide you some liability shield, assuming the business checking account isn't an extension of your personal bank account (e.g. commingling all of your personal and business expenses).

[aa-0987654321]

Thanks, Evan.

Do you know if my following understanding is correct?

If my husband and I share the ownership of LLC (with S Corp election) at 40%:60%, but only I am the active manager for the company since he has his full time job. In this case, I have to pay self employment tax only on my salary part of income. He doesn't have to pay for self employment tax for his income from LLC since he is a passive investor only. Is it correct?

Thanks!

Caro

[Evan]

If you're an S-Corp and you're the sole owner, it'd be the same thing. You're explanation is correct if you don't elect the S-Corp status.

[aa-0987654321]

Thank you very much, Evan.

Is my understanding correct now? If my husband and I share the ownership of LLC (Without S Corp election) at 40%:60%, but only I am the active manager for the company since he has his full time job. In this case, I have to pay self employment tax only on my salary part of income. He doesn't have to pay for self employment tax for his income from LLC since he is a passive investor only.

In the same situation above, if we elect S corp for the LLC, although we share ownership, since I am the only manager, I would be considered as the sole owner? Thanks!

[Evan]

Your explanation regarding the taxation of the LLC (without S election) is plausible, though not definitive as the IRS has tried considering all members of an LLC as passive investors (to limit losses), and also argued that they were active investors (to maximize self-employment taxes) depending on the case. Your interpretation is reasonable and currently supported, though again not necessarily "concrete". I'd say yo

Regarding the S-Corp status, if you have two members of an S-Corp, you're not the sole owner... even if he's not an active member.

[aa-0987654321]

Hi Evan,

Really appreciate your insights. Thanks a lot!

I wonder if the following understanding is correct?
If my husband and I share the ownership of LLC ( With S Corp election) at 40%:60%, but only I am the active manager for the company since he has his full time job. In this case, I have to pay self employment tax only on my salary part of income. He doesn't have to pay for self employment tax for his income from LLC since he is a passive investor only.

Thanks again!

[Evan]

Uhh, not quite right. All money the entity earns as an LLC wouldn't be subject to self-employment taxes. Any amounts EITHER of you draw as a salary would be subject to payroll taxes, not self-employment taxes. That means you need to register as an employer in your state, and pay all the other related taxes.