Help setting up new entity

Technical topics regarding tax preparation.
#1
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I have a confusing situation. A & B are individuals. B has a type of consulting firm, where she finds facilitators (TP A) that provides services to others. Clients pay B, and B then forwards 75% of the payments to A, holding back the other 25% to cover items effectively for the IP to facilitate these groups. A receives a 1099 from B. B only has a couple of other clients besides A.

Now A & B want to go into business together. They will together find other facilitators for their groups – covering several states. The facilitators will pay the new entity a lump sum recruitment fee to get access to the IP, training, security checks, etc.

However, A & B also plan to keep their original relationship the same – with A being a facilitator for B. A will get 100% vs. the 75%. A will kick in $100k for the new entity, while B will contribute the IP. SO we now have three businesses: A who will continue as a facilitator and keep receiving a 1099 from B; B – who will get money from her other clients who are facilitators, and A-B, who will become an entity and find separate facilitators all over the country.

A couple of questions:
1. Can A can still continue on as the 1099 employee and utilize her solo 401(k), or if this structure blows that up.
2. They are working with an attorney to decide the type of entity. So far the attorney is thinking that an LLP may be better than an LLC, but I thought LLC’s are easier to set up in other states?
3. They will be paying these facilitators all over the country via 1099’s. I should probably have the attorney determine if the facilitators should be W-2’s or 1099’s? If W-2 – then we have a lot of states to set up, but can get around that with 1099’s? I think I am missing something big in this area.
 

#2
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CalGalCPA wrote:A couple of questions:
1. Can A can still continue on as the 1099 employee and utilize her solo 401(k), or if this structure blows that up.
2. They are working with an attorney to decide the type of entity. So far the attorney is thinking that an LLP may be better than an LLC, but I thought LLC’s are easier to set up in other states?
3. They will be paying these facilitators all over the country via 1099’s. I should probably have the attorney determine if the facilitators should be W-2’s or 1099’s? If W-2 – then we have a lot of states to set up, but can get around that with 1099’s? I think I am missing something big in this area.


#1: I don't see why not. She'll just have a contract with B/B's other company outside of the new venture. There's no such thing as a "1099 employee" however. A worker will either be an independent contractor (1099) or an employee (W-2). I'd also be interested to see how CA's new employee tests apply to your client, if she's in CA. It's very possible A should have been considered an employee of B.

#2: I'm assuming the attorney is examining it from the legal perspective. You can make a "check the box" election to have the entity taxed as an S Corp or C Corp. By default it will be a Partnership, which may be better initially due to flexible income/loss allocation.

#3: You don't really get to pick. A worker is either an IC or employee based on all the facts and circumstances. e.g. level of company control over the worker and how work is done, worker's other activity outside the company, worker's use of company property or their own property, etc. CA has a more onerous definition of employee that came out recently, which I touched on lightly above. If you and the client aren't comfortable making that determination it would be best to consult an employment attorney.
 

#3
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Thank you.

1. Yes - I misspoke about a "1099-Employee." I know the difference - just worded it incorrectly in my haste. Yes - Dynamex is a problem looming out there, and for 2019 should determine if the I/C is still appropriate. It's B's issue (my client is A) but am concerned about the solo 401(k) going forward. My initial thought was that there would be some sort of affiliation issue, thereby disallowing the solo 401(k). Still looking into that.

2. Yes - leaving that to the attorney, but was wondering if I can add other outside advice.

3. This is a pretty big set-up. I am going to leave to an employment attorney. I am concerned other states will follow Dynamex in time.

I still think it's funky that A will be working for B as a facilitator, while at the same time working WITH B to get other facilitators on board. Going back to the I/C issue for a moment, I wonder if this "B" part of Dynamex will apply - The worker performs tasks that are outside of the usual course of the hiring entity's business." Is this a fine line? BEING a facilitator within company AB, and AB itself - which is LOOKING for facilitators to use their IP software programs, etc?
 


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