Finance

Why You May Not Need an LLC

9 April 2021By Tom Andrews
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Written by

Tom Andrews

This tax advice is not intended, and cannot be used, to avoid any penalties as a result of taking any position from this column. Thomas Andrews is a CPA and a principal of AvMar Accounting Services. +1 954 764 0404; www.avmaraccounting.com

One of the more common questions clients ask me is, “Should I form an LLC?” The answer to that question depends on a number of factors, but in most cases, the answer is no. Normally, the only maritime professionals that will benefit from forming an LLC are captains who can meet the criteria set forth by the IRS to determine who may qualify as a contractor. The criteria the IRS uses can be accessed directly at the IRS website under Topic 762 and Publication 15-A or Publication 1779. 

It should also be noted that more and more vessels are coming into compliance with U.S. payroll tax law, which means that crewmembers are given W-2s with taxes withheld. When given the option to be W-2’d with taxes withheld, I normally recommend this choice.

While there are advantages and disadvantages to doing business as an LLC, you must remind those who are using this tax structure that they have a clear understanding of why they’re doing business as a company. It’s important to understand the relationship that you have with that entity. Too often, I’ll consult with a new client doing business as an S Corporation/LLC only to realize that they really don’t have a full understanding of the structure.  

It should also be noted that more and more vessels are coming into compliance with U.S. payroll tax law, which means that crewmembers are given W-2s with taxes withheld. 

I’m seeing less of a need for crew to incorporate or form an LLC. However, there are still valid reasons to do so. Some crew who are working on foreign-flagged vessels may be worried about the undocumented nature of their income, while others work for owners that mandate they form an LLC. Whatever the reason the taxpayer has to form a company, it’s vital to understand the basic reasoning behind these decisions, the advantages and disadvantages of doing business as a company, and most of all, to understand how that entity is taxed and what their responsibilities are in maintaining that entity. 

Another point to consider is whether the crewmember intends on purchasing a home in the next two years. Typically, a lender prefers to see a consistent income structure over a two-year period. For example, if you’re earning income as a W-2 employee in “year one,” the lender might expect to see “year two” income as a W-2 as well. 

I’ve worked with clients that have been denied loans because the taxpayer worked as an “employee” in one year and then a “contractor” in the next. To compound matters, luxury yacht crew already experience obstacles when purchasing homes as the lenders typically don’t understand the industry. If you’re currently between jobs, it may also be worth waiting until you’re close to signing on to the next program. Some taxpayers will form an LLC only to learn that the next employer pays them as an “employee.” Often, the employer has no choice how they categorize crew (as an “employee” or a “contractor”).  

This article originally ran in the April 2021 issue of Dockwalk.

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