I was curious about the limitations of an LLC. What would stop a family of four from forming an LLC for the purpose of, say, buying and selling on Ebay.
Then register all of your vehicles, transfer your house, and any other property to the LLC. First, this would make you personally judgment proof as you could apply for credit in your own name and not pay. Let em sue you. You have nothing to take.
Second, since LLCs income is passed through to your individual taxes, what is to stop you from charging all of your expenses to the LLC? Utility bills, Food, Meals out, basically EVERYTHING.
Then on your personal income tax, you have your salary from your other job that would be offset by these huge losses from your LLC, basically reducing your taxes to near zero.
As long as I actually did the minimum (buy and sell a few things on Ebay, keep minutes of company meetings, etc) would there be any laws violated by this plan?
You’re violating a healthy bunch of laws here.
Much of what you’re proposing is tax fraud.
Another segment of it is an asset protection scheme (becoming ‘judgement proof’) that might very well work against unsophisticated creditors without good lawyers, but would be useless if you owed a large amount of money to someone with effective counsel.
Just to be clear, I’m not looking for advice as to how to commit illegal activity. I’m curious as to exactly why it would be illegal. I have a registered LLC, I am conducting business (albeit in a half-assed manner). I would be keeping personal assets separate from company funds.
Under what theory would a good lawyer pierce the veil of my company if I kept things accurate?
There are plenty of people who set up family partnerships. Some of these are legitimate… the one you describe is just tax fraud.
The bottom line is that an LLC doesn’t make something deductible. An LLC merely passes through income and expense. So if groceries isn’t tax deductible to an individual, it won’t be deductible through the LLC either.
Deductible expenses are “ordinary” and “necessary” to the business activity. So cost of goods and shipping expense? Deductible, because eBay sellers all pay those. Groceries and doctor’s bills? Not deductible - no matter what entity pays for it.
Hmmm. I should probably elaborate, got antsy with the Post Quick Reply button back there.
On deductibility:
To the extend that expenses are usual, customary, and expected within your trade, you can generally deduct them.
Buying occasional food for employees is customary and least partially tax-deductible at some firms, especially if it’s being done for a holiday.
That being said, no firm I’m aware of buys all meals for its employees, especially when those employees are able to live at home.
No way that’s going to fly.
The IRS will, in fact, go after you for that if they discover it.
Check these rules, if you’re thinking of deducting meals during travel:
As to utility bills, there are rules that determine what portion of your home may be deducted for business expense.
Check this: http://www.irs.gov/newsroom/article/0,,id=108138,00.html
Depending on the number of rooms exclusively devoted to storing Ebay stock and office supplies/equipment, you might be able to deduct a good portion of your house.
I do, in fact, make a living selling on Ebay and the like out of my house.
I only use a small % of my house for this purpose due to my inventory mix and drop shipping, so I choose not to increase my audit risk just to save a couple hundred dollars per year.
In closing,
Setting up a business for the sole purpose of tax deductions is not a good use of your time.
If you don’t go too far, and you’re lucky when the IRS looks at what you’re proposing above, you’re likely to just catch fines, penalties, and interest charges.
If you go too far or the IRS is lacking a sense of humor when you get caught, you could wind up in jail.
Don’t trust internet strangers for tax/legal advice. A good CPA at tax time can cost you $225 and save you $8000 as well as weeks spent defending yourself in an audit.
Yeah, you are inclined to think about doing bad things because that’s human nature.
I’m the same way, and imagine that most Dopers get that you’re just playing with a bad idea in your head.
The corporate veil doesn’t need pierced in order for your debts to be collected despite your assets being corporate.
Seeing as the corporation IS one of your assets, all of your corporate assets can be taken by personal creditors.
If you organize the LLC properly, and hold shareholder meetings and the rest, an LLC certainly CAN protect your personal finances from business creditors.
Bear in mind, of course, that almost no one gives owners of newer, smaller privately held LLCs credit unless that owner agrees to personal and corporate liability for the loan.
What if I put in the bylaws that members of the LLC are provided free food and free doctor visits as compensation for their services? Also, as part of their compensation package, members are entitled to the use of the LLC’s home and use of company vehicles.
Big time corporate CEOs do this. Do they have to pay personal income tax on the perks like having a chauffeur-driven limousine drive them to and from work? And the meals out and the food were used when we had meetings to discuss company business.
I don’t doubt that you could go too far with this, but what do legitimate family partnerships do? And why wouldn’t the asset protection scheme work/be legal?
Okay, just because something is a benefit doesn’t mean it’s not income on the employee side.
A local bank gives away free toasters and blenders to employees that do a good job, but those employees DO have to pay income tax.
Giving awesome stuff to employees can be deductible for the company, but that doesn’t mean the employee isn’t on the hook for it as income.
I don’t know if big-time corporate CEOs pay taxes on those perks, but the law is pretty clear that they should be doing so.
Asset protection is really a separate topic.
Who OWNS the LLC in question?
The assets CAN be seized if you own them.
You REALLY need a good lawyer if you’re trying to do this.
That topic is a mess… the real question is what creditors you’ll wind up with, and how much you owe.
If you’re 6 layers of LLC in 5 countries deep, running assets around the world… you can still get popped if you get the right people on your trail.
Who owns the LLC? What is stopping a creditor from trying to execute based on your ownership of the LLC? Depending on when and how it was set up, you could be looking at an action for fraudulent conveyance.
If you do this, then the LLC gets the deduction and you increase the taxable income of the individuals. The effect is netted out. $10,000 of expenses to the LLC is now $10,000 of additional income to you.
And here’s a perfect example related to big-time CEOs and the like: the company car. Most people who get a company car do not realize that the value of the car (lease payments, generally) has been included in their salary. If the car is going to be excluded from salary, there are additional documentation requirements and the car is not allowed to be used for personal functions.
I do have some clients with legitimate family partnerships. Usually, they’re used to hold investments and spread the income out over multiple family members. Let’s say the partnership owns a large apartment complex and 20 family members own it. Let’s say $1500 of income gets attributed each year to little Johnny and Susie, who have no other income and therefore pay no tax on these earnings. This saves Dad $1000 in tax each year. Maybe it even hires Johnny and Susie to mow lawns and paint fences - $5000 in payroll deductible to the partnership, but not taxed to the kids because of their low income. (Dad saves another $1,600 in tax). Furthermore, the kid’s shares are not part of Dad’s estate when he dies. So the estate pays tax only on his $100,000 share of the apartment complex, not on the full value of $2,000,000. (Hypothetically saving something like $1,000,000 in estate tax).
Obviously, this partnership only deducts expenses related to the running of the complex only - it’s not paying for groceries, cars, etc. It’s generating relatively modest tax savings, but these savings definitely add up over time.
That’s interesting. The place I clerked for last summer took its employees on a nighttime riverboat cruise and on another occasion we went to a minor league baseball game, booze and food provided.
Legally, should I have reported the cash value of those things for income tax purposes? Or could you legitimately call them part of your business “duties” because the firm does it to help morale, relieve stress, etc.
To get really ridiculous, should I have to pay tax from drinking the coffee provided by the firm every morning?
Well, I’d check with the company and payroll to make sure those expenses were already on a 1099 you got hit with, or on your payroll already.
As to the free coffee… honestly, ask a CPA if you feel guilty about it.
Coffee is a de minimis benefit (of minimal value, and not taxable). Generally anything with no cash value and less than $25 of market value can be a de minimis benefit.
The other entertainment and meal expenses can be treated in multiple ways. If the company has a legitimate business purpose (and they might, even if just morale building), then they can take a deduction for 50%. If they make the meals and entertainment part of the employees’ pay, then they can deduct 100% of it. So, you’ll know how cheap your employer is if you pay attention to the pay stub.
I worked in a hotel. The employees were able to eat in the employee’s lunch room. If the hotel did not charge for the meals then they would have to calculate the benifit and charge SS taxes to the employees. Because the employees could not bring in food from home and had to eat the hotel food the meals were not income taxable.
Years ago when I was shipping my Socal Security income had room and board added to it and I had to pay SS taxes on it.
Some big tech companies like Google and Facebook provide free meals to employees. I’m fairly certain that those benefits do not appear as taxable income on their W-2s (or 1099s). How does that work?
My wife worked at a school that prevented staff (both admin and instructors) from leaving campus during lunch. Because you could not leave, lunch could be provided by the employer without appearing as taxable compensation to the employees. It was “for the employer’s convenience” that made the difference.
But let’s also not forget that employers are frequently flat-out wrong. For example, I would bet that more than half of restaurants in the US are doing their payroll wrong. Comp’d meals are just the tip of the iceberg. I have an ex-client who signed up and then left when I explained how to do things right. Their assertion: “But I’ve been doing it this way for 18 years!” Yeah… just tell that the to the auditor.