LLC - limiting liability is evidently a desired benefit granted by the State

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Permalink Reply by Gerald W, Brooks on February 23, 2010 at 4:04pm

I am a laborer, (retired – 66 yrs old) but I have been more than aware of LLC’s, through the years. What I have seen is that the ‘pay’ they give themselves goes to maintaining, improving and growing their business. I have seen a number who do otherwise, they generally end up closing their business, loosing it, and some even go to jail for unlawful behavior. My point is this, the state will destroy – DESTROY – the small business advantage this state enjoys and further drive up unemployment. These business owners are able to build a reserve fund on which they can draw; otherwise they will be dependent on borrowing from banks or other institutions. Incur debt in the form of interest and be limited in their endeavors by meeting requirements not necessary to their endeavor. I know first hand of a company which could not get a bank loan, their business wasn’t a realistic enterprise; they went on funding it themselves and grew into a multi-million dollars business. I would dare say in part because they hadn’t the added burden of loan interest payments and the freedom to believe in themselves, freedom to try and fail or succeed. I understand the desire the current state government has for additional funding, I absolutely know the reason I am out of a job, though only a part time employee, is because of the problems of bank lending practices which government only helped to create. Also, there is the soon to be increase in taxes due to the sunset of the Bush tax cuts. They either do not have money to spend or are not spending the money they have as generally it incurs higher taxes on their property for one thing. The business I worked for cut myself and a full time worker; the LLC tax will probably bring the business to a close. This tax should not be imposed. Additionally what in the NH Constitution gives the State the power to limit a persons compensation?
GW Brooks

Permalink Reply by Doug Hall on March 1, 2010 at 11:14am

Thank you for replying to my post! I was beginning to wonder about whether this experiment in online discussion of public issues was going to have much discussion at all.

I do want to take the opportunity to respond to your comment. Perhaps that will get others to join us.

The owner of an LLC that is making a profit should leave that profit IN the LLC if he/she wants to generate a reserve fund (an asset on the LLC's books) and avoid having to take bank loans for growing the business. What the "LLC tax" actually taxes is money that is taken OUT of the business for the personal benefit of the owner(s). It taxes the money that WON'T be used to grow the business.

Not only that, but when that profit is taken as compensation it will be taxed at the owner's marginal personal income tax rate by the federal government!

For this reason I don't see how your argument works.

Nobody's compensation is being limited at all. What is being discussed is what threshold above which the tax takes effect. This is common in almost all taxes. As but one example, NH's interest & dividends tax has a threshold: the first $2,400 of interest and dividends is untaxed for a single individual, $4,800 for a couple. Anything above that amount IS taxed. The discussion is at what level to set the threshold. There is no discussion of limiting compensation, at least as I understand it.

Permalink Reply by Gerald W, Brooks on March 1, 2010 at 6:05pm

Doug,
What is ‘personal benefit’ of the owner?
If it only taxes the money that WON’T be used to grow the business (ie: household expenses, insurances, retirement funds, maybe even a vacation, $50,000 max exempted) is it that the State also has a reimbursement to the owners for their personal funds which does ‘grow’ the business? How is it that the State can limit their monetary compensation which they pay themselves before levying a tax and say it is not an income tax? To say compensation isn’t being limited, it is, as that above the State’s ‘threshold’ the individual begins paying State as well as Federal tax on their personal compensation ie: income. You say it taxes money that is taken OUT of the business, for U.S. Federal income tax purposes the owner reports the LLC's income on his or her own tax return on Schedule C. How then is it that any compensation paid to themselves is considered by the State as ‘taking money out of the business’? They are the business. What threshold is there for ‘professional compensation’ lawyers, doctors, college professors as apposed to business compensation, what is the threshold on personal compensation for employees, CEO etc of non profits in this state before the state begins to tax their compensation.
Can any business LLC stash away in a reserve fund a million or more dollars, not to be taxed by the state or be deemed excess profits improperly channeled to avoid the states business profits tax and from it be free to use it in their business free of state oversight; and if the LLC is in fact viewed by the IRS as the individuals (partner or what have you) person finances for tax purposes isn’t that viewed as personal compensation as well by the IRS.
And besides, you say, you don’t understand how my argument works. I’d simply stated that business owners are able to build a reserve fund on which they can draw, how is that any different from your ‘leave that profit in the LLC to generate a reserve fund’ the owners are the LLC as far a IRS tax purposes are concerned.
The problem here is not the entrepreneur, it is State spending.
I believe there is more to this than the state simply wanting more money, trying to close a loop hole or level the playing field. It is about control, about government oversight into our lives. Whether the players in this game realize it or not, actually understand the result of their well intendedness (my new word) they are destroying not just the NH advantage but NH itself. What happened to failure, or achievement, being number two or not making it all but at least having been able to try. You over looked my statement that the people were not given a loan because the bank determined their business endeavor couldn’t succeed, but were able to go ahead because here in NH they could ‘try’. I could go on about how the liberal thinking has stolen so much from us all in the name of fairness, compassion, and invented ‘rights’.
The thing is here, just call it what it is, and State Personal Income Tax, because that’s what it is. Answer with a yes or no first then play out the argument one has.

here is an article from the Union Leader

((http://www.theunionleader.com/article.aspx?headline=Call+made+to+re...))
Andy Sanborn of Concord
Hearings in the Senate and House focused on the LLC tax, and the issue of how to tax business profits while allowing business owners to pay themselves a reasonable salary.
He also criticized a proposed House bill that would set limits on reasonable compensation for business profits tax purposes. The fear is that rate of business tax audits, already hitting 1 in 10 returns, will increase if the limits are put in place.
The state allows reasonable compensation to be deducted from a company's taxable profits. Anything over the limit is subject to an 8.5 percent tax. Business owners claim their compensation, and DRA audits can challenge them.

Penny Boucher of Lee, who is a partner in two LLCs with her husband, said they already struggle with rental income and long hours in their real estate business.

"To have someone tell us what is reasonable compensation when we're working 70 hours a week, on call for tenants 24/7 is, well, disheartening," Boucher said.
The bill offers business owners several "safe harbor" options for calculating compensation without fear of audit. They include a $50,000 cap on any business, no matter how many partners own it, or a percentage of gross revenue or the sale of business assets, or a reasonable return on investment. Each of the percentage options would be set in rules by the Department of Revenue Administration.

GW Brooks

Permalink Reply by Gerald W, Brooks on March 23, 2010 at 5:49pm

Doug Hall,
You said you appreciated a reply, but then are not willing to continue the exchange.
Perhaps I am missing something here, perhaps my level of comprehension is lacking.
I quite well understand the stretch of the 1923 law taxing investment and the State creating a new definition of investing: starting a business with one’s own personal funds, and realizing profit. Odd that the State excluded the Professional who invested in their attending Law School, Medical, Business or what ever and realize a profit in the form of compensation well in excess of $100.oo and hour. A Business Profits Tax should be just that, a tax on profit and it is generally understood that profit is what is left after all expenses, including wages and salary, from the gross.
If an individual running a business pays themselves $100.oo an hour or more how is it that having to justify their salary to the State, is not called a limiting of what they pay themselves. If the State taxes the 'profit' and allows $50,000.oo to be taken as compensation before attaching a .05% tax there would most likely be little discussion today. That the current body in the State House wishes to start an Income Tax call it what it is.
A hundred years ago the Federal Govt. established an income tax, but only on the ‘rich’, those earning $2,000.oo a year (they failed to attach an adjustment for inflation). In 1942 FDR issued a presidential edict taxing all income over $25,000.oo at 100%. There was also a tax on undistributed income (savings), there wasn’t an allowance for lost income due to a business that didn’t work out.
I would just ask you and others call something what it is, reply with a yes or no, and just be up front. You say, “If they don't do that, then we'll know that it didn't hurt too much.” That the State takes the .05%, perhaps enough to keep a job from being created; but then that won’t hurt too much.
GW Brooks