Power Washing and Roof Cleaning Forum

I spoke with other folks in the same business of soft washing and got different signals, so I addressed the question about the best choice as to legal and tax entities with an EA named Thomas A Blair in Callahan, Florida.    He explained in some detail to me that sole proprietorships, partnerships, Limited Liability Companies (LLCs) and S-corporations have common flaws in all of them.   He provided me with a nice chart showing the various legal and tax entities, both pros and cons, on each.

Most of the other firm owners I spoke with in soft washing were LLCs and Mr. Blair showed me some things that made the LLC to be not to my liking:

(1) LLC single member = ignored by IRS = pretty much the same as a sole proprietorship

(2) LLC multi-member (LLC - MMBR)= protects only the investor(s) property but not the owner(s) personal properties ... and different states have different treatments of the LLC, single member and multi-member ... and while you can elect to be treated by IRS as a regular C corporation while you are indeed an LLC, your true legal status in liability and lawsuits is still the default of the type of LLC you legally are in your state. 

(3) LLC MMBR generates self-employment income and self-employment taxes and denies any special treatment of desired fringe benefits to members who are also material participation worker, and neither LLC or LLC MMBR status eliminate needs for filing annual 1099-MISC (also same as sole proprietorships, partnerships, etc.) ... and all "fringe benefits" remain fully taxable. 

(4) LLC and MMBR have established limits to not more that 2 years of "paper" losses out of every 5 consecutive years of operations under the IRS "hobby loss" rules ... too many losses for too many years puts your business under the IRS collections audit selection process.   Same is true of almost all legal and tax entities, but IRS ignores this "hobby loss" rule except for non-profits and "regular" C corporations.   But sole proprietorships, partnerships, LLCs and S corporations are likely to be IRS audited at a rate of once each 7 to 10 years "on average" ... whether profitable or otherwise.

(5) Regular C corporation legal and tax status grants dozens more opportunities to qualify for charge account credit terms, acquisition of capital (including sales of shares ... more or less a right to "print your own money" to acquire needed assets without adding onto business debt-service monthly payments), deductions for a multitude of "employee fringe benefits (even to shareholders who are also employees), etc., etc.; eliminates having to issue 1099-MISC to other firms that provide them completed W-9 forms as exempt from backup withholding, have opportunities to "income average" through Net Operating Loss (NOL) carrybacks and carry-forwards, and is one of the least-audited-by-IRS legal and tax entities of them all ... something like 1 in 400 for those firms generating less than $5 millions per year.

(6) And the "threat" of "double taxation" (the "gotcha" according to those who usually don't know what they are talking about or who have their own agenda ... attorneys love to handle lawsuits against LLCs) can be pretty much done away with through simple tax planning using the funds to acquire operating equipment that can be later resold, improve fringe benefits to the shareholder/employees, or "stored up" in capital to acquire other firms, types of other business operations, fund an employee pension plan, provide continuing education to employees (including the children of shareholder/employees who are hired and become employees of the firm itself), etc., etc.

(7) The "regular C" corporation can easily be a "parent organization" and own or control through share ownership percentages other firms (including vendors) under the same corporate umbrella ... and the other entities don't work so well when there is more than one type of business operation (for example: sole proprietorships have to file a separate Form 1040 Schedule C, or E, or F for each and every distinctive business (i.e.: If you are a soft wash operation that also invests in rental properties, or a farm, those two or three (or more) types of businesses require different forms filings, and have variously different rules.   While the C corporation can have all those various "income streams" under the same corporate umbrella and use incomes and losses to "balance out" in the short term to improve the value of the business and its' various assets for the long term (i.e.: a way to fund a retirement, long-term care insurance, tuition of student/employees, etc., etc.).

There will be lots of people out there who won't agree with these comments.   Make them prove what they tell you in writing and they will not be able to do so.   Tom has 34 years' practical experience in these types of questions "garden variety taxpayers" ask and he proactively answers with practical examples.    I hope it is appropriate to do so, and suggest you contact him at www.tomblairea.com

Respectively submitted,

William L. Morris

Comm-Tech Cleaning, Inc.

(904) 304-2455

Serving the NE Florida/SE Georgia area