May 7, 2018

Planning for the future can sometimes be difficult.  Creating an estate plan can give you the peace of mind you need, while also making it easier for your loved ones to handle your affairs when you die.  We often find that while our clients understand the basics of certain estate planning documents, they are often surprised to see that many of these documents are multifaceted and serve multiple purposes.

A Last Will and Testament is a legal document memorializing your wishes on how you, the testator or creator of the Will, want your estate to be distributed after you die.  If you die without a Will, your assets will be distributed according to state statute, also known as the laws of intestacy.  For example, in New York State, if you die with a surviving spouse and children, your spouse will receive the first $50,000 of your estate and then one-half of the balance.  The remainder will be distributed equally amongst your children. This is not ideal for someone who wants all their assets to go to their surviving spouse.

Instead of being bound by the laws of intestacy, one can create a Will that specifies to whom they want their assets to go and how they want their assets to be distributed.  Under the scenario above, a Will would allow the Testator to distribute their assets to their surviving spouse.  Only if the spouse predeceases the Testator should the assets be distributed to their children.

The Will has functions other than just listing the distribution of assets upon death.  For parents with young children, a Will allows a guardian to be named for minor children.  Also, if there are beneficiaries that are minors or incapacitated, the will can provide that the assets be distributed in trusts on behalf of those beneficiaries.   Many clients will choose to leave assets to beneficiaries in trusts in other circumstances, such as for creditor protection or to delay the age by which they can have full access to the funds.  A Will can also create a Supplemental Needs Trust for beneficiaries who currently receive, or may be in need of, means-tested government benefits.

Another advantage of executing a Will is that it allows the creator to waive any bond that the executor would otherwise have to pay in order to administer the estate.  A bond is often required by the court to protect the interests of the distributees and beneficiaries of one’s estate.  Depending on the size of the estate, the bond may have a large annual premium which will be paid out of the assets of the estate.  A Will can also provide for the decedent’s wishes regarding funeral arrangements and cremation.

It is important to have a Will even for individuals who hold all accounts jointly with another person.  While the joint assets will go directly to the co-owner, the terms of the Will can be used to administer any assets that are held outside of the joint accounts.  An estate account will have to be opened to cash any checks delivered after death that are made payable to the decedent, including tax refunds or a return of other funds.  Having a Will ensures that these funds are distributed to the appropriate persons.

Creating a Last Will and Testament can help avoid many of the pitfalls that occur when a person dies without any estate plan in place.  We strongly recommend seeking a Trust and Estates, and Elder Law professional to help determine the right estate plan for you. 

The following is an informative article from the American Council on Aging concerning Medicaid look back periods.

When a senior applies for long-term care Medicaid, whether that be services in one’s home, an assisted living residence, or a nursing home, there is an asset (resource) limit. To be eligible for Medicaid, one cannot have assets greater than the limit. Medicaid’s Look-Back Period is meant to prevent Medicaid applicants from gifting assets, including selling them under fair market value, to meet Medicaid’s asset limit.

All asset transfers within the Look-Back Period are reviewed by the Medicaid agency. This includes transfers made by an applicant’s spouse. If the Look-Back Rule has been violated, a Penalty Period of Medicaid ineligibility will be established. This is because had the assets not been outright gifted or sold under their fair market value, they could have been used to pay for the elderly individual’s long-term care. Note that assets transferred prior to the Look-Back Period are not penalized.

The Look-Back Period begins the date of one’s Medicaid application for long-term care. Generally speaking, the “look back” is 60-months (5 years). As an example, a Florida resident applies for Medicaid on Jan. 1, 2023; their Look-Back Period extends back to Dec. 31, 2017. All financial transactions between these dates are subject to review.

Examples of transactions that violate the Look-Back Period and could result in penalization include the following: Money gifted to a granddaughter for her high school graduation, a house transferred to a nephew, collectors’ coins sold for half their value, and a vehicle donated to a local charity. Additionally, payments made to a personal care assistant without a formal Personal Care Agreement can violate the Look-Back Period.

Even after the “initial” Look-Back Period, if a Medicaid beneficiary comes into some money, say for example, via an inheritance, and gives all (or some) of the money away, they are in violation of the Look-Back Rule. This means that despite an initial determination that one has not violated the 60-month Look-Back Period and is receiving long-term care Medicaid, they can violate this rule, and hence, be disqualified from Medicaid benefits.

The following is an article from Merrill Lynch discussing the role of Trusts.

 
wealth planning

As with wealth planning in general, many people think trusts are appropriate only for the very affluent. But personal trusts are a powerful planning tool that can deliver benefits for a wide range of people across the wealth spectrum.

Are trusts an appropriate planning tool for you? It depends, of course, on your unique financial situation, family needs and goals. But trusts are growing in popularity precisely because they are so flexible and able to address a variety of objectives, from the simple to the complex. Some of the ways trusts might benefit you include:

• Protecting and preserving your assets.
• Customizing and controlling how your wealth is distributed.
• Minimizing federal or state taxes.
• Addressing family dynamics; for example, divorce or blended families.
• Helping a parent or other relative manage their financial affairs.

play BOFA TRUST Solutions video

• Revocable trusts allow you to retain as much control as you like over the trust and the assets you place in it. You can serve as trustee of your own revocable trust, change the trust’s terms whenever you like, add or withdraw assets at any time, and name a successor trustee to take over should you no longer wish or be able to serve as trustee.
  
  Your ability to transfer almost any type of asset to the trust, including financial assets, real estate and even private business interests, makes them helpful in consolidating and managing assets.
  
  You can also use a revocable trust to document how you want the assets in the trust to be managed, distributed and used after you are gone. Often, people believe a will is sufficient to handle all their needs. However, it’s important to note that a will only works when you die. A revocable trust provides benefits during your life as well, such as continuity in the event you become incapacitated. Assets in revocable trusts also avoid probate, enabling you to avoid the public disclosure, time and fees associated with it.
  
  
• Irrevocable trusts allow you to permanently remove assets from your taxable estate and cannot be changed once executed.
  
  Irrevocable trusts can be used to provide for a spouse and children from a prior relationship, help ensure that your heirs manage and use funds wisely and minimize federal and state wealth transfer taxes.

Title: The Pros and Cons of a Revocable Trust

Introduction:

A revocable trust, also known as a living trust, is a legal entity created to hold ownership of an individual's assets during their lifetime, and to distribute those assets after their death. The primary advantage of a revocable trust is that it allows the trust maker to maintain control over their assets while providing for an orderly transfer upon death. However, like any financial planning tool, revocable trusts come with their own set of pros and cons.

Pros of a Revocable Trust:

Avoidance of Probate: One of the key advantages of a revocable trust is that it allows your assets to avoid the lengthy and often costly probate process. Assets held in a revocable trust transfer directly to the beneficiaries without needing court approval, which can expedite the distribution of assets after death.

Flexibility: As the name suggests, revocable trusts are changeable during the lifetime of the grantor (the person who establishes the trust). This means you can modify the trust terms, add or remove assets, and even dissolve the trust entirely if your circumstances or wishes change.

Privacy: Unlike a will, which becomes public record once it is submitted to probate court, a revocable trust is a private document. The distribution of your assets remains a private matter between the trustee and the beneficiaries.

Continuity of Management: In the event of incapacity, a successor trustee that you've appointed can step in and manage your affairs without court intervention, which can provide peace of mind and prevent a potentially burdensome guardianship or conservatorship proceeding.

Cons of a Revocable Trust:

Cost and Complexity: Establishing a revocable trust involves more upfront costs and complexity compared to drafting a simple will. It requires the transfer of assets into the trust, which can be a time-consuming process.

No Tax Benefits: Unlike certain types of irrevocable trusts, a revocable trust does not provide any specific tax advantages. The assets in the trust are still considered part of the grantor's taxable estate, which means they could be subject to estate taxes upon death.

No Creditor Protection: Because the grantor maintains control over the assets in a revocable trust, those assets are not protected from creditors. This means if the grantor incurs significant debt, the assets in the trust could be used to satisfy those debts.

Potential for Misunderstanding: Some people mistakenly believe that having a revocable trust avoids the need for a will. However, a will is still necessary to designate guardians for minor children and to handle any assets not included in the trust.

Conclusion:

While a revocable trust can provide a range of benefits, including privacy and avoidance of probate, it's not the right solution for everyone. It's important to weigh the pros and cons carefully, and consult with a financial advisor to determine whether a revocable trust fits your personal financial goals and estate planning needs.

The Relevance of a Medicaid Trust

The Medicaid Trust, a vital element in comprehensive estate planning, has gained relevance in the current socio-economic landscape. It is an irrevocable type of trust specifically designed to protect assets from being counted as personal resources in determining Medicaid eligibility. As the aging population continues to expand, and long-term care costs rise, the need for Medicaid Trusts is becoming increasingly evident.

To qualify for Medicaid, one's financial assets and income must be under certain limits. However, the costs of long-term care such as nursing homes, assisted living facilities, or home health care can deplete a family's wealth rapidly. Medicaid Trusts have emerged as a powerful tool to safeguard family assets, while still allowing individuals to qualify for Medicaid support.

Here's how it works: When assets are transferred into a Medicaid Trust, they are no longer counted as the individual’s personal resources. This enables people to meet Medicaid's strict income and asset requirements, potentially qualifying for benefits that cover long-term care costs. Crucially, this can be accomplished while still ensuring that assets are effectively managed and preserved for future generations.

However, there's a key point to note: the five-year look-back period. Transfers into Medicaid Trusts within five years before applying for Medicaid can be penalized, meaning potential ineligibility for Medicaid for a specific period. Hence, early planning is crucial. The five-year look-back period underlines the relevance of Medicaid Trusts not just for those immediately needing Medicaid, but also for those planning for potential future needs.

Medicaid Trusts also offer tax advantages. They are typically structured as grantor trusts for income tax purposes, meaning the individual who transfers assets into the trust continues to pay income taxes on the trust income, thereby not increasing the tax burden on the beneficiaries.

The relevance of a Medicaid Trust extends beyond mere financial planning. It is a tool of compassion that can ensure a dignified life for seniors needing long-term care, without putting undue financial strain on the family. It also provides peace of mind to the younger generation, knowing that their inheritance is secure, and that their parents' care is well-provided for.

In conclusion, the increasing relevance of Medicaid Trusts can be attributed to their role in protecting assets, planning for long-term care, and offering a humane approach to the financial challenges of aging. Despite its many advantages, creating a Medicaid Trust is a complex process that requires careful planning and legal expertise. Consulting with an experienced elder law attorney is recommended to navigate this process effectively and to create a Medicaid Trust that best meets individual and family needs.

Below is an article published by the Record-Courier from 2022

In Nevada, a deed upon death that allows real property to pass to a beneficiary upon the death of the original owner is relatively easy to execute and it becomes effective upon execution and recording.

The revocation of a deed upon death is not difficult either, but the statutory requirements have to be followed.

The grantor, so the original real property owner, can revoke the deed upon death at any time during his or her lifetime. The deed upon death can be revoked either by executing a revocation document or by executing another deed upon death. Both documents have to be signed, notarized, and recorded.

When the deed upon death is executed by two or more joint tenants, the revocation is effective either when all joint tenants sign the revocation or when it is executed by the last surviving joint tenant. If the real property is owned by tenants in common and they all executed the deed upon death together, the revocation is effective with respect to the share of real property owned by each tenant in common who executed the revocation document.

Importantly, a deed upon death cannot be revoked by execution of a last will and testament.

On the other hand, the transfer of title to the real property after the grantor’s death is much more complicated, especially since the latest legislative updates were implemented.

First, the beneficiary needs to record a Death of Grantor Affidavit and a certified copy of the death certificate in the county recorder’s office where the real property is located.

Next, a Notice to Creditors must be executed by the beneficiary and mailed to: (1) the personal representative of the grantor’s estate, if known, (2) all known creditors, and (3) the Department of Health and Human Services (Medicaid). Additionally, the Notice to Creditors must be published in a newspaper of general circulation.

Any person or institution having a claim against the grantor of the grantor’s estate must file a claim with the beneficiary within ninety days of the mailing or the first publication of the Notice to Creditors. Claims not filed within the prescribed period are barred forever. Any filed claims must be appropriately accepted or rejected by the beneficiary. If the claim is rejected, the claimant may file suit to pursue the claim.

Further, within forty-five days of the Notice to Creditors being mailed to Medicaid, Medicaid must either provide a waiver of claim confirming that no Medicaid assistance was received by the grantor or, if the grantor had received assistance, Medicaid can impose a lien on the real property. Failure to provide notice to Medicaid results in the real property remaining subject to the Medicaid’s right to recover even after the transfer to the beneficiary.

Once the time for creditors to file their claims has run out, all the creditors are satisfied, if needed, and when the Medicaid waiver is received, the real property can be distributed pursuant to the terms of the deed upon death without any personal liability attaching to the beneficiary for the debts of the grantor.

Notably, a beneficiary may disclaim his or her interest in the real property by recording the disclaimer in the county recorder’s office where the real property is located.

The transfer of real property to a beneficiary via deed upon death can be costly and lengthy. Typically, passing the real property to a beneficiary via trust instrument is more efficient.

The following article is brought to us by Pacific Workplaces, who are not licensed attorneys, but are in the business of selling workspaces throught the United States.  Article published in 2023.

Nevada has become a popular state for entrepreneurs to set up their LLCs due to its favorable business laws and tax climate. Entrepreneurs looking to launch a business in cities like Las Vegas and Reno enjoy some of the lowest incorporation fees and favorable tax laws in the country. Here are some of the main benefits of setting up an LLC in Nevada:

Nevada has some of the most favorable tax laws in the United States. The state has no personal income tax, no corporate income tax, and no franchise tax. This means that LLC owners and their businesses can keep more of their profits, which can be reinvested back into the company.

Nevada is known for being pro-business and has a long history of supporting entrepreneurs and small business owners. The state has a favorable regulatory environment and a streamlined process for forming an LLC. This makes it easier for business owners to get their businesses up and running quickly and efficiently.

One of the primary benefits of an LLC is its ability to protect the personal assets of its owners from business debts and liabilities. In Nevada, LLC owners have limited liability protection, which means that their personal assets, such as their homes and savings, are protected in the event of a lawsuit or financial difficulties.

LLCs in Nevada are highly flexible, which means that business owners can choose how they want to structure their businesses. They can choose to be taxed as a partnership, sole proprietorship, corporation, or even as an S-corp, depending on their individual needs and circumstances.

Nevada has a streamlined process for forming an LLC, which means that business owners can get their businesses up and running quickly and easily. The state also has a low cost of formation, making it an affordable option for entrepreneurs and small business owners.

Nevada is located in the western United States and is close to major markets such as California, Arizona, and Utah. This proximity makes it easier for businesses to access these markets and take advantage of the opportunities they offer.

From Chat GPT

Aug 2024

 IN NEVADA, DOES A NEW DEED COVERING NEW OWNERSHIP OF A HOME FILED MORE RECENTLY THAN A DEED UPON DEATH TRUMP THE OLD DEED UPON DEATHChatGPT

In Nevada, when determining the priority of deeds related to property ownership, the most recent validly recorded deed generally takes precedence over earlier deeds. Here’s how it typically works:

1. Purpose: A Deed Upon Death, also known as a Transfer on Death (TOD) deed, allows property owners to designate a beneficiary to receive the property upon the owner’s death without going through probate. The TOD deed only takes effect upon the owner's death.
2. Revocation: A TOD deed can be revoked or superseded by recording a new TOD deed or another type of deed (like a warranty deed) that changes the ownership of the property.

1. Purpose: A new deed that transfers ownership of a property to someone else (e.g., a warranty deed, quitclaim deed) changes the legal ownership of the property immediately upon its execution and recording.
2. Effect on TOD Deed: If a new deed is executed and recorded after a TOD deed, and it effectively transfers the property to new owners, it generally supersedes the TOD deed. The new deed takes precedence as it reflects the current intentions and actions of the original owner during their lifetime.

• Recording: For any deed to affect property ownership, it must be properly executed and recorded in the county where the property is located. The recording provides public notice of the change in ownership.
• Revocation of TOD Deed: The recording of a new deed that conveys the property to different owners or back to the original owner effectively revokes the TOD deed. This is because the property is no longer part of the decedent's estate to be transferred upon death.
• Legal Advice: Since property law can be complex and varies by jurisdiction, it is advisable to consult with a real estate attorney in Nevada to ensure that the deeds are correctly executed and recorded and that the desired outcome is achieved.

In summary, a new deed that is validly recorded will generally trump an earlier Deed Upon Death if it changes the ownership of the property. Proper execution and recording of deeds are crucial to ensuring that the intended transfer of property ownership is recognized legally

Here is an article published by Jon Davis of Anpoy

 
12:54

If you run a business with no employees other than yourself, then you’re in good company: 33.2 million small businesses are individually operated in the United States, according to the US Small Business Administration. As a team of one, a lot of key decisions will fall to you, including selecting the right structure for your business entity — plus establishing a payroll system for yourself as both owner and employee.

Your options include establishing as a sole proprietorship or single-member limited liability company (LLC). And while making this decision may not be the most exciting part of being your own boss, it is one of the most important decisions you’ll make. The business structure you select influences everything from your tax responsibilities to the paperwork you’re required to file and the risks to your personal assets.

• Single-member LLCs provide personal liability protection while offering flexible tax options
• LLC owners can choose between pass-through taxation or corporate tax structures to optimize their tax situation
• Operating as an LLC may allow for more tax deductions compared to sole proprietorships
• Carefully weigh the pros and cons of LLC formation, including setup costs and ongoing maintenance requirements

According to the US Small Business Administration (SBA), a sole proprietorship is the “simplest and most common structure chosen to start a business.” However, you may want to consider becoming a single-member limited liability company (LLC) because of the potential LLC tax benefits that come with this structure.

It’s always wise to turn to a trusted advisor, like your accountant, for guidance on the business structure that’s right for you, but let’s take a closer look at the basics.

Get more of our expert-reviewed content directly in your search results. Add OnPay as a preferred source on Google for answers you can trust.

A single-member LLC is just as it sounds a limited liability company with one owner (referred to as a member). It’s an alternative to being a sole proprietor, but with some notable differences.

One of the biggest benefits of operating as a single-member LLC is that, in most instances, it protects you from personal liability. This means that when forming an LLC, the company becomes its own legal entity and your personal assets like your house and vehicle won’t be at risk if your company faces lawsuits or bankruptcy.

Establishing a single-member LLC does require some legwork. Start-up requirements vary from state to state, but this typically includes filing Articles of Organization (part of a legal document used to establish an LLC at the state level),and paying legal and filing fees, which range from around $50 to $800 depending on the state.

“Generally speaking, you form a single-member LLC by registering with the state in which you reside and do business. Most states require filing paperwork to form an LLC, which includes articles of organization.”

— Peggy James, CPA and OnPay expert contributor

And on an ongoing basis, once your business is registered and established, there may also be annual fees (from zero to $800+) as well as reporting requirements in your state, so it pays to do some research.

Most states do not require an operating agreement when forming a single member LLC, so it’s up to the discretion of the person registering the LLC whether to have one. It can be less important for a SMLLC than a multi-member LLC; for the latter, an operating agreement can help to define roles and responsibilities, which could be particularly important if disputes arise down the road.

— Peggy James, CPA and small business consultant

One of the main reasons a sole proprietorship (also sometimes referred to as a sole-tradership) is among the easiest and most common business structures is because you don’t have to take any formal action to become a sole proprietor, such as filing paperwork. For example, if you’re a freelance writer, then presto! you’re already a sole proprietor.

However, unlike a single-member LLC, as a sole proprietor, there’s no legal separation between you and your business. That means you can be held personally liable for the debts and obligations of the business. This liability consideration becomes especially important if you’re planning to grow your team. Can sole proprietors have employees? Yes, but understanding the compliance requirements is critical. To put it another way, being a sole proprietor does entitle you to all company profits, but you’re also responsible for all the business’s debts, losses, and liabilities. It’s something to keep in mind as you determine the best path for your needs.

Here is a breakdown of the primary differences to consider:

Sole ProprietorshipSingle-Member LLCNo action or paperwork needed to establishRequires filing Articles of Organization and may also involve filing ongoing annual reports or other compliance-related paperworkNo legal separation between you and your business — you are liable for debts and lossesYou are protected from personal liability if the company faces bankruptcy or litigationNo fees involved in setupInitial set-up fees range from $50 to $800. There may also be annual fees of as much as $800.

But these aren’t the only differences between the two structures. There are also tax differences to keep in mind.

Beyond limiting personal liability, the flexibility in taxation is likely the second biggest benefit of forming an LLC.

Typically, a single-member LLC is taxed the same as a sole proprietorship, meaning that your LLC is considered an “entity disregarded as separate from its owner” in the eyes of the IRS. As a pass-through entity, any business tax obligations are passed on to your personal tax return through a Schedule C.

An LLC, however, can elect to be taxed as a corporation either as a C Corporation or S Corporation. This option can reduce your self-employment tax burden, because only the salary you pay yourself is subject to self-employment taxes.

As a C Corporation, profits are taxed at the corporate income tax rate, which could prove to be advantageous. There is, however, the risk of double taxation when your company is taxed on its profit, and taxed again when dividends are paid to you on your individual tax return.

Forming an LLC does not help with taxes. It is an entity formed to provide liability protection but is treated as a disregarded entity by the IRS for tax purposes.

— Peggy James, CPA

When you choose to be taxed as an S Corporation, however, you can avoid the downside of a double tax hit. Income tax gets reported on your personal income tax return without being subject to corporate tax rates.

According to SCORE, a nonprofit organization and resource partner of the SBA, generally, “LLC owners find the S corp option more attractive than the C corp because, with C corp tax treatment, profits are taxed at the corporate level, and then the distributions made to the owner are taxed on the individual level, as well.”

Something business owners should also keep in mind is that while they will not be paying self-employment taxes on their entire profit, they’ll need to pay FICA taxes and regular income tax on their salary, if they choose to be taxed as an S corp.

In terms of business structures, there can be a lot to keep track of, so we’ve included a quick overview below for reference:

Business structureOwnershipLiabilityTaxesSole proprietorshipOne personUnlimited personal liabilityPersonal tax only – Pass-throughPartnershipsTwo or more peopleUnlimited personal liability unless structured as a limited partnershipSelf-employment tax (except for limited partners)

Personal tax

Pass through

Corporation – C CorpOne or more peopleOwners are not personally liableCorporate tax

Dividends/etc.

Owners file W-2

Corporation – S CorpOne or more people, but no more than 100, and all must be US citizensOwners are not personally liable

Can’t have money in the accounts at the end of the year

Personal tax

Owners draws or W-2s

Pass through

Limited liability company (LLC)One or more peopleOwners are not personally liableSelf-employment tax

Personal tax or corporate tax

Pass through

Corporation – NonprofitOne or more peopleOwners are not personally liableTax-exempt, but corporate profits can’t be distributedMulti-member LLCTwo or more ownersOwners are not personally liableSelf-employment tax

Can file Form 2553 to be taxed as C or S Corp

“There are lots of web-based payroll services out there, but OnPay delivers ease of use and responsive customer support at an affordable price.”

— Gerty Leong, Sun + Moon Catering

As a single-member LLC filing as an S Corp, you may also be able to deduct expenses that are not deductible for those filing as a C Corp. While occasionally overlooked, don’t sleep on these potential savings: they can add up!

For instance, many single-member LLC owners and sole proprietors work from a home office and might not realize they’re able to deduct personal expenses such as internet, phone, or even their vehicle. Additional deductions could include promotional events held at your home (or elsewhere, such as a trade show), subscription costs for publications related to your business, and licensing fees to conduct your business.

Here is a breakdown of key points associated with the different tax structures:

Only taxed once. You avoid the downside of a double tax hit.

Income tax gets reported on your personal income tax return without also being subject to corporate tax rates.

Risk of double taxation when your company is taxed on its profit, and taxed again when dividends are paid to you on your individual tax return.

S CorpC CorpMay be able to deduct losses on personal income taxes if you meet certain criteriaCannot write off losses on personal income tax returnsOrganizing as an S Corp may result in lower self-employment taxC Corps subject to lower maximum tax rate than S Corps

There are many factors to consider when determining the best tax status for your LLC. If you are trying to figure out the best fit for your needs, it can be a good idea to reach out to your accountant for their thoughts.

As a single-member LLC, you don’t get paid a traditional salary. Instead, you withdraw money from your business account as needed, which is referred to as an “owner’s draw.”

Definition: An owner’s draw is money taken from the business equity account or profits for personal use or expenses.

As the owner, you can withdraw as much as 100% of the equity, but should keep in mind that doing so will leave your business with little to operate.

It’s a good idea to consider various factors when deciding the timing and amount of an owner’s draw including your business’s cash flow, historically busy or slow seasons, and expected operating expenses. Ultimately, the IRS advises paying yourself a “reasonable” salary, but leaves it up to you to determine what that amount is.

If your LLC is taxed as a corporation, you’ll be considered an employee and you may have to pay yourself through payroll. This means you must follow the same tax rules as any other employer, including withholding payroll and income taxes from your pay and filing quarterly employer tax returns.

While the specific amount and timing of an owner’s draw is up to you, there are some best practice steps to follow so that you have a paper trail.

• Draft a check on your business account that is made payable to yourself and deposit the check into your personal bank account
• You can also make a direct deposit from your business account to your personal account
• Keep a record in your business accounts of this withdrawal. Your paper trail can either be in the form of a check or records of an online transfer.

Here’s another insight from frequent OnPay contributor, certified public accountant, and small business consultant, Peggy James, CPA.

The owner of an LLC that has not made an election to be taxed as a corporation should not be on the payroll or otherwise treated as an employee. For tax purposes, the owner of a single-member LLC is considered a sole proprietor, and net business income is subject to self-employment taxes.

— Peggy James, CPA

Keep in mind that you’ll need to set aside enough money to pay your tax bill come tax season if you utilize an owner’s draw.

This is because when using the owner’s draw form of payment, there is no tax withholding from your pay. But that money is still considered taxable income and as such, you’ll be required to report it to the IRS and pay federal, state, and local taxes on the money just like any other form of earned income.

As a single-member LLC, of course, you don’t file separate IRS returns for your business. But rather, report your business profits and losses on a Schedule C that’s submitted as part of your personal income tax filing. This process requires paying taxes on all of your LLC profits — even if you did not draw those profits to pay yourself.

If you decide to have your LLC taxed as a corporation that changes the game a bit.

If your LLC is taxed as a corporation, you’ll be considered an employee and you may have to pay yourself through payroll. This means you must follow the same tax rules as any other employer, including withholding payroll and income taxes from your pay and filing quarterly employer tax returns.

Partnering with a payroll service provider can help ensure you remain compliant and up to date on any legislative changes when you opt to pay yourself through payroll.

After you’ve gained a better understanding of how a single-member LLC operates, read our guide to Form 8832, which explains how to elect a new tax classification.

For many, structuring a  business as a single-member LLC can make sense given the many potential benefits.  It’s important, however, to weigh all of the pros and cons when determining what’s best for you.

• Pro: No personal liability. When structured as a single-member LLC, you are protected from personal liability in association with the business. This can be important if you’re operating a high-risk business.
• Pro: Personal asset protection. In the event of bankruptcy, creditors cannot pursue your home or personal holdings. This can be helpful if you have significant personal assets.
• Pro: Tax benefits. Because single-member LLCs are considered “disregarded entities” by the IRS, there’s no separation between the business and the owner for income tax purposes. In other words, business profits are passed through and reported on your personal income tax returns. You’ll also be able to write-off expenses associated with your business.
• Con: Increased set-up cost. Remember, a LLC involves a bit more set-up including paperwork and costs. This typically includes filing Articles of Organization. Your initial filing fees could be as high as $800.
• Con: Ongoing maintenance and filing requirements. Even after you’ve registered your business, you’ll still have filing requirements to meet and fees to pay. Depending on where your business is located, you may need to file an annual report or pay franchise taxes. The state of California, for instance, charges an $800 annual franchise tax.

Keep investigating whether you want to expand your business in the coming year (and seeking capital to do so), we have a resource on how SBA loans work that can provide further useful guidance.

It’s important to think carefully about the structure that might work best for you and your business, sorting through such questions as your ability to keep up with filing requirements, the tax benefits, and protection from bankruptcy and liability.  While it is possible to convert to a different business structure down the road, this process may not necessarily be easy. There could be restrictions based on your location and it could result in tax consequences, among other complications.

According to Section 446(e) of the Internal Revenue Code, taxpayers are required to obtain consent from the IRS before changing a method of accounting for federal income tax purposes. You also may need to re-register with the IRS, and could end up receiving a new EIN, so it’s best to get it right at the start.

In the end, turn to a trusted advisor such as an accountant for guidance on the business structure that’s right for you.

Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.