Business Formation

First, congratulations on your decision to form your own practice!

To answer your question, I will make a few comments.

First, a PLLC and an LLC are both creatures (creations) of state law. I practice as a CPA in Texas, so I cannot speak to Washington state law. From my experience in Texas, if you have a license (such as a CPA license), you are required to form a PLLC instead of an LLC (if you choose to operate through a limited liability company).

Second, from a federal income tax perspective, there is no difference in federal income tax treatment between a PLLC and an LLC. Why? Because for federal income tax purposes, there are generally only four (4) ways to get taxed – as a disregarded entity, partnership, C corporation, or S corporation. If you will be the sole owner of the company, your choices are really disregarded entity, C corporation, or S corporation. You can’t have a partnership with just one partner.

Third, I think you’re asking which is better (a PLLC or an LLC) in terms of federal income tax treatment. If that is your question, then they are treated the same. Again, the actual federal income tax treatment depends on how to choose to treat it – going back to the four choices I listed above. So the treatment doesn’t depend on whether it’s a PLLC or LLC.

I hope that answers your question. Feel free to contact me if you wish to engage me to help.

Daniel, good question. To answer your question, I will make two comments.

First, because your son is underage, you should put just your information as the responsible party on the Form SS-4 (Application for Employer Identification Number) or its online equivalent on the IRS’ website.

Second, I think your question reveals some confusion. On the Form SS-4 (or its online equivalent on the IRS’ website), you should indicate that there will be two LLC members (you and your son). After filing the Form SS-4, if you take no further action to elect to treat the LLC differently for federal income tax purposes, then the LLC will be treated as a partnership for federal income tax purposes (because you told the IRS on the Form SS-4 or its equivalent that there will be 2 LLC members). If you want to treat the LLC as something other than a partnership (such as a C corporation or an S corporation), you cannot accomplish that goal just by filing the Form SS-4 or its equivalent. That would take a second step with a different form.

I hope that helps. Feel free to contact me if you wish to engage me to help. Even though I practice as a CPA in Texas, I have clients in other states.

If we are going to use exact terminology, an LLC taxed for federal income tax purposes cannot have “retained earnings.” Retained earnings is a term used in the context of a C corporation or S corporation.

You are correct that an LLC is a pass-through entity (assuming that it’s taxed for federal income tax purposes as a disregarded entity, partnership, or S corporation). If the LLC is taxed for federal income tax purposes as a pass-through entity, then, yes, owners will pay tax on their percentage, regardless of whether it’s reinvested, left untouched in members’ capital, or distributed to owners.

Feel free to contact me if you wish to engage me to help with anything. Even though I practice as a CPA in Texas, I have clients in other states, as I do multi-state returns.

As a CPA, I came across this website and joined just last week, and I just came across your question.

I agree with your attorney wholeheartedly that you should talk with a CPA about your specific circumstances (and the specific circumstances of the other potential LLC member) in order to plan the best way to structure the business for tax purposes. Also, in making that decision, it’s important to consider what you plan to do with the business. Keep in mind that an LLC is a creation or creature of state law. How it is treated for federal income tax purposes is a completely separate matter. Because two of you are involved, you are correct that (for federal income tax purposes), the LLC can be treated as a partnership, C-corporation, or S-corporation. Making the Subchapter S election is how you elect to treat an LLC as an S corporation, so a Subchapter S election is not a fourth type of entity/choice.

In all honesty, the issue of entity election that you are raising is one that is extremely fact-specific, so you really should engage a CPA to listen to your situation and advise you. Feel free to check out my profile on this website as well as Google reviews and please feel free to contact me, if you wish to engage me to help navigate you through the issue at hand.

One of the changes imposed by the Tax Cuts and Jobs Act is the creation of new Section 199A, “Qualified Business Income”.
This new code section, non-corporate taxpayers (including trusts and estates) that have Qualified Business Income (“QBI”) from a partnership, S Corporation or sole proprietorship can take a deduction of up to 20% of the QBI.

QBI is generally defined as the net amount of income, gain, deduction and loss relating to a qualified trade or business and effectively connected to the conduct of the trade or business within the United States.

If the net amount is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year.

Certain types of income are specifically excluded from being treated as QBI, and thus not eligible for the deduction. Investment income along with reasonable compensation payments, guaranteed payment to a partner for services rendered and payments for services to partners not acting in their capacity as partners are not included.

The deduction is a deduction from AGI in arriving at Taxable Income. It is not an or above the line deduction.

A limitation is imposed on income from certain specified service businesses, including businesses that perform services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing with securities and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

Specifically exempt from the definition of service business are engineering and architectural services.

For pass-through income from a service business, a limitation phases in when the owner’s taxable income (from all sources) exceeds $157,500 for single taxpayers and $315,000 for married taxpayers filing joint returns and is completely phased-out when taxable income exceeds $207,500 and $415,000 respectively.

A second limitation applies based upon W-2 wages and capital of a trade or business. In general, the deduction cannot exceed the greater of 50% of the W-2 wages of the business; or the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property”.

Qualified property is defined as all tangible, depreciable property held by and used by the business at the close of the year.

The limitation based on W-2 wages and capital does not apply to any passthru entity owner with taxable income that does not exceed the $157,500/$315,000 threshold. Once income exceeds this amount, the W2/Capital limitation phases in and applies fully once the taxpayer’s taxable income exceeds the $207,500/$415,000 threshold

One of the changes imposed by the Tax Cuts and Jobs Act is the creation of new Section 199A, “Qualified Business Income”.
This new code section, non-corporate taxpayers (including trusts and estates) that have Qualified Business Income (“QBI”) from a partnership, S Corporation or sole proprietorship can take a deduction of up to 20% of the QBI.

QBI is generally defined as the net amount of income, gain, deduction and loss relating to a qualified trade or business and effectively connected to the conduct of the trade or business within the United States.

If the net amount is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year.

Certain types of income are specifically excluded from being treated as QBI, and thus not eligible for the deduction. Investment income along with reasonable compensation payments, guaranteed payment to a partner for services rendered and payments for services to partners not acting in their capacity as partners are not included.

The deduction is a deduction from AGI in arriving at Taxable Income. It is not an or above the line deduction.

A limitation is imposed on income from certain specified service businesses, including businesses that perform services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing with securities and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

Specifically exempt from the definition of service business are engineering and architectural services.

For pass-through income from a service business, a limitation phases in when the owner’s taxable income (from all sources) exceeds $157,500 for single taxpayers and $315,000 for married taxpayers filing joint returns and is completely phased-out when taxable income exceeds $207,500 and $415,000 respectively.

A second limitation applies based upon W-2 wages and capital of a trade or business. In general, the deduction cannot exceed the greater of 50% of the W-2 wages of the business; or the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property”.

Qualified property is defined as all tangible, depreciable property held by and used by the business at the close of the year.

The limitation based on W-2 wages and capital does not apply to any passthru entity owner with taxable income that does not exceed the $157,500/$315,000 threshold. Once income exceeds this amount, the W2/Capital limitation phases in and applies fully once the taxpayer’s taxable income exceeds the $207,500/$415,000 threshold

Complete and file S Corporation Federal election form Form 2553, no more than two months and 15 days after the beginning of the tax year the election is to take effect, or
At any time during the tax year preceding the tax year it is to take effect.
Most states require a state election form in addition to the federal election form to be filed.
For this purpose, the 2 month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is no corresponding day, use the close of the last day of the calendar month.

A late election to be an S corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553. However, relief for a late election may be available if the corporation can show that the failure to file on time was due to reasonable cause.
To request relief for a late election when the tax year beginning on the date entered on line E ends on or after December 31, 2007, a corporation that meets the following requirements can explain the reasonable cause in the designated space on page 1 of Form 2553.
The corporation fails to qualify to elect to be an S corporation (see Who May Elect on page 1) solely because of the failure to timely file Form 2553.
The corporation has reasonable cause for its failure to timely file Form 2553.
The corporation has not filed a tax return for the tax year beginning on the date entered on line E of Form 2553.
The corporation files Form 2553 as an attachment to Form 1120S no later than 6 months after the due date of Form 1120S (excluding extensions) for the tax year beginning on the date entered on line E of Form 2553.
No taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) has reported inconsistently with the S corporation election on any affected return for the tax year beginning on the date entered on line E of Form 2553.
Similar relief is available for an entity eligible to elect to be treated as a corporation (see the instructions for Form 8832) electing to be treated as a corporation as of the date entered on line E of Form 2553. For more details, see Rev. Proc. 2007-62, 2007-41 I.R.B. 786.
To request relief for a late election when the above requirements are not met, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 2008-1, 2008-1 I.R.B. 1 (or its successor). However, the ruling and user fee requirements may not apply if relief is available under the following revenue procedures.
If an entity eligible to elect to be treated as a corporation (a) failed to timely file Form 2553, and (b) has not elected to be treated as a corporation, see Rev. Proc. 2004-48, 2004-32 I.R.B. 172.
If a corporation failed to timely file Form 2553, see Rev. Proc. 2003-43, 2003-23 I.R.B. 998.
If Form 1120S was filed without an S corporation election and neither the corporation nor any shareholder was notified by the IRS of any problem with the S corporation status within 6 months after the return was timely filed, see Rev. Proc. 97-48, 1997-43 I.R.B. 19.

The IRS service center will notify the corporation if its election is accepted and when it will take effect. The corporation will also be notified if its election is not accepted. The corporation should generally receive a determination on its election within 60 days after it has filed Form 2553.
If box Q1 in Part II is checked, the corporation will receive a ruling letter from the IRS that either approves or denies the selected tax year. When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted.
Care should be exercised to ensure that the IRS receives the election. If the corporation is not notified of acceptance or nonacceptance of its election within 2 months of the date of filing (date faxed or mailed), or within 5 months if box Q1 is checked, take follow-up action by calling 1-800-829-4933 1-800-829-4933.
If the IRS questions whether Form 2553 was filed, an acceptable proof of filing is (a) a certified or registered mail receipt (timely postmarked) from the U.S. Postal Service, or its equivalent from a designated private delivery service (see Notice 2004-83, 2004-52 I.R.B. 1030 (or its successor)); (b) Form 2553 with an accepted stamp; (c) Form 2553 with a stamped IRS received date; or (d) an IRS letter stating that Form 2553 has been accepted.