The third installment is going straight to CliffsNotes. If we assume the same things but reinvest all of the pub's income, this is what I think will happen:
-If we're taxed as a default LLC, Jane and I will each take home $22,725.62 and each of our investors will take home -$250.
-If we're taxed as an S-Corporation, Jane and I will each take home $23,395 and each of our investors will take home -$250.
-If we're taxed as a C-Corporation, Jane and I will each take home $24,645 and each of our investors will take home $0. However, the pub will lose $3,000 of its reinvestment to corporate income tax (we'll keep $17,000 instead of $20,000).
This is how I expect the first couple of years to look as we build up a cash reserve to prepare for unplanned expenses. We need to research other implications of choosing C-corporation taxation for an LLC, such as how oppressive the paperwork will be. We'll keep you posted; hopefully without all the boring math!
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7 comments:
perhaps this is a testatment to my geekhood, but I actually find this thread really interesting. I always knew starting a company and implications for taxes/etc were complicated, but it's nice to see it broken out into a "real" example.
Why don't you make the brewpub a hunting club, and try to get non-profit organization status?
Just saw the article on thedailypage about you. Good luck with navigating all that tax code and getting the brew pub going! I love the Great Dane and Capital Brewery and welcome another in the area.
This is why despite CPA training and studying tax in law school, I hate all things tax. Business decisions should not be based on tax law, yet owners are forced to waste inordinate amounts of time on these issues.
Seriously though, how much would the small investors need to invest?
Thanks for the encouragement!
For logistical reasons, we're going to need to set a minimum investment limit. For example, there's no way we'd be able to keep track of 5,000 investments of $100. The number of investors will also affect how we'll be treated under federal and state securities laws (for every state where the investments come from), with fewer investors being favorable. Minimum investments in the $10K-$20K range seem common, but we don't know many people with that much free cash (we're expecting most of our capital to come from friends and family). Having investors pool their money would reduce our workload, but it wouldn't change the securities issues. We're still learning the rules, so we're not sure what our minimum investments will be yet.
Regarding the securities law issue, make sure you know what you're doing before you do it. I wouldn't rely on self research. You will want to bring in a specialist in securities law. The potential results if you screw up are worse than if you mess up on the tax side.
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