Sec. 1706 of the Tax Code

Thu Dec 8 11:42:23 MST 2016

If you end up suing a normal Corporation and you win, you can file a judgment and then wait to get paid or until they go bankrupt. There’s no penalty.

LLCs have a quirk in that if you try this approach, the only way to actually collect is through a “charging order”, which has a trap in it that puts you on the hook for taxes earned and payable by the entity from current income they generate while you’re waiting to be paid. You’ve basically been granted an interest in the business by the court that creates a liability for both you and the company, but you have no controlling interest in the business because you’re not a member (shareholder) — you simple have the right to get paid first whenever the members decide to distribute anything to members, which isn’t required by law. I don’t know if this is affected based on how the LLC handles its taxes, but most self-employed consultants typically set up their LLCs choosing to be taxed as partnerships, similar to how an S-corp would work. I’ve been told by several folks over the years they will not do business with such entities because they effectively have no recourse if things go south. It’s a kind of “poison-pill” strategy that some folks are smart enough to stay away from.

>From the consultant’s perspective, this can be great! But just be aware that there are companies who won’t engage you under these conditions.

-David "The Tool Wiz" Schwartz

> On Dec 8, 2016, at 1:29 PM, James Dugger <james.dugger at gmail.com> wrote:
> 
> It is understandable that hiring a contract employee's LLC is risky, the answer is in the name - Limited "Liability" Company.  LLC's were designed to make it easy to get the advantages of incorporation without its full formal rigid tax and accounting structural requirements.  The biggest advantage is as a liability shelter.  The Real Estate Development Industry literally runs on them.  
> 
> They are intentionally setup to make it legally difficult for another entity to "pierce the financial veil of the corporation".  The biggest advantage of an LLC is not the one your contracted with.  It's the second or third that you don't have access to.
> 
> What I mean by this is that if you are an entrepreneur and you own say 5 different businesses all LLC's and one client contracted through one of your LLC's successfully sues you, Assuming your other LLC's are not contracted with the client (under the same contract) They legally cannot pierce your other LLC's to go after additional assets. This is by design.
> 
> I have several LLC's and have used them to shelter activities between contracts for years, for this reason.  Granted I am not contracting as a "contract employee" in these instances clients are hiring my company. As is how it should be.
> 
> So it is understandable that large corps would not want to hire LLC's because they are taking the risk.
> 
> On Thu, Dec 8, 2016 at 10:26 AM, Rusty Ramser <rusty_ramser at hotmail.com <mailto:rusty_ramser at hotmail.com>> wrote:
> "Forming an LLC in AZ is simple ... and takes 3 or 4 hours (for a beginner) over about 6 weeks."
> It's even easier than you realise.  It should take about 1 hour (2 at the absolute most) over the course of a single Saturday afternoon.  If you want to hand-carry your forms into the government office in downtown Phoenix that processes them, that will add a few hours during the work week.  But barring that, it's absurdly easy to set up an LLC.  There are plenty of lawyers, CPAs, etc. that are happy to charge you a hefty fee to handle the paperwork of establishing an LLC -- don't fall for that rubbish.
> 
> Cheers.
> 
> 
> -----Original Message-----
> From: PLUG-discuss [mailto:plug-discuss-bounces at lists.phxlinux.org <mailto:plug-discuss-bounces at lists.phxlinux.org>] On Behalf Of Keith Smith
> Sent: Friday, 9 December 2016 04:01
> To: Main PLUG discussion list
> Subject: Sec. 1706 of the Tax Code
> 
> 
> David, you have brought up Sec. 1706 of the Tax Code several times over the years.  I am not familiar, however from what you describe it sounds like it prohibits a programmer from becoming a sole proprietor, however it sounds like it does not stop agencies from doing contract work.
> 
> What is an agency?
> 
> I'll read Sec. 1706 of the Tax Code when I get done with my current project and have more time.
> 
> Sounds like the solution is to form an Limited Liability Company (LLC).
> My accountant says it is legitimate to form an LLC and be a one man band and to have only one client.  He say that is a legit business.
> 
> Forming an LLC in AZ is simple.  Fill out the forms the state provides pay your fee with the filing and publish.  I think it costs about $85 and takes 3 or 4 hours (for a beginner) over about 6 weeks.
> 
> Anyone have any thoughts?
> 
> --
> Keith Smith
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> 
> -- 
> James
> 
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