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Holding/Operating Companies & S Corps


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I have a situation I am trying to address with a client and hoping for some input from here.

Currently this client has a LLC taxed as a S Corp in California.

The owner is moving out of state and wants to start building up another location. During this time we want to create a holding company in this new state. So profits from the subsidiary in California will flow into the holding company. Ultimately the owner will take his personal income through the Holding company.

Couple notes:

 

The CA LLC (currently taxed as an S corp) will eventually bring on a long time employee as a minority owner (10%). This will most likely start 2022.

If it works legally, in the beginning, this holding company (out of state) will offer the same services as the CA business. Once this grows into something substantial we would start another entity for this particular location. And like the CA entity, profits will flow into the holding company.

The holding company will also hold trademarks and copyrights.

For the best tax advantage, I would like the holding company to be taxed as an S corp. I think this is best to minimize tax liability for the owner.

What is the best way to handle entity/tax treatment for in CA?

Can profits from CA flow as management fees(1099)? instead of Dividends(if c corp) or distributions(if s corp). Some behind the scene calculations would have to take place to make it fair for the employee that would become an owner. So maybe a hybrid of the two (management fees & (Dividends or Profit Distributions.)

I believe it is out to have CA be taxed as an s corp due to the holding company not owning 100% (when the employee becomes an owner).. am I correct on this? as it would be a QSub?

If the subsidiary in CA was converted to taxed as a c corp, will the holding company get hit with double taxation on the dividends?

What about the CA LLC taxed back as the default, a partnership?... I think I would run into the issue of the employee not able to be on payroll.. and would not be the best for him as his distributions would be taxed as self-employment income.

Any input on this would be awesome. Let me know what you all think!

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1 hour ago, Andrew Evans said:

Let me know what you all think!

What I think is that your multitude of questions is well beyond what anyone here would be able to answer appropriately to your best advantage, and that you, as the CEO, should hire a tax attorney that practices in the states involved to formulate the plan(s) on how best to structure these businesses to achieve your objectives and who will be able to provide the pros and cons of the plan(s).

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21 minutes ago, jklcpa said:

What I think is that your multitude of questions is well beyond what anyone here would be able to answer appropriately to your best advantage, and that you, as the CEO, should hire a tax attorney that practices in the states involved to formulate the plan(s) on how best to structure these businesses to achieve your objectives and who will be able to provide the pros and cons of the plan(s).

Thank you for your input on the matter. As the accountant/consultant for this client I am edger to completely understand what needs to be done. Any questions you can chime in on would be awesome. 

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