I live in Virginia and am thinking about setting up an LLC. My new business is Life Insurance. I will be the sole owner (unless there is an advantage to use an adult child as an “silent” owner).
What advantages does Delaware provide over Virginia?
What Federal/State taxes are reduced by a single owner LLC versus a sole proprietorship?
In an LLC, can the LLC pay the all the business expences…and then a salary to the owner? Does it have to show a profit? How does the sole owner minimize his personal taxes with an LLC.
The advantages of incorporating in Delaware compared to another state have more to do with C-Corporations and the potential liability of shareholders and boards of directors. If you register your LLC in Delaware, but live and operate your business in Virginia, you will still be subject to taxation in Virginia, so effectively you will have to file returns in two states if you register in Delaware. When you say life insurance business, I assume that means as an agent or broker, so I would also suggest you contact the agency in Virginia that licenses those types of businesses as some states require that your LLC be formed in the same state in order to be licensed.
LLC’s choose how to be taxed for federal purposes. The default choice for federal tax purposes is that a single member LLC is the exact same as a sole proprietorship. Alternatively the LLC might elect to be taxed as an S or C corporation. In Virginia, a single member LLC that is a disregarded entity pays a $50 annual fee, there is no additional tax reporting. If the entity files as an S or C corporation, there are additional returns that must be filed for the state. That means there are no federal or state taxes reduced for a single member LLC that files as a sole proprietor. There can sometimes be tax savings when a single member LLC files as an S-Corporation, but there are additional tax and reporting requirements that go along with electing S-Corporation status, which are beyond what I could cover here.
A single member/sole proprietor LLC should pay all the business expenses, but it would not pay a salary to the owner. Instead the owner can take distributions from the LLC’s checking account as the sole owner will personally pay tax on all the net profits of the business.
The answer on being required to make a profit is a complicated issue that requires consideration of what are known as “hobby loss rules” and really should be a discussion you have with your tax professional who can consider all the factors in your specific situation.
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