Frequently Asked Questions

I am starting an online business that I hope will grow into a store. For now the business is dropship. Do I need to incorporate or LLC my business?

I am starting an online business that I hope will grow into a store. For now the business is dropship. Do I need to incorporate or LLC my business?

 

 

There isn’t any reason you couldn’t use either one.  Depending on your state and tax situation, there may be a reason to go one way or the other, however both entities will provide the separation of business and personal assets.

 

You could also form as a sole proprietorship as the drop ship model is very low risk, unless the product has some potential safety issues you are worried about or if you have employees.  Going into a storefront, there may be some benefit to multiple LLC if you are also going to own the building so as to create some additional liability protections and potential tax benefits.

 

 

I am wanting to remove my wife as a member from the LLC. What needs to be done? We live in Texas.

I am wanting to remove my wife as a member from the LLC. What needs to be done? We live in Texas.

 

 

Our Response: Before going forward with removing a member, be sure there are no stipulations in your operating agreement that may require board action.  If there are no stipulations, you and your wife are the only members or there is no operating agreement, LLCs can easily remove members change management by making a record of the change internally and then update the records with the Secretary of State.

 

There are two items to complete with the Secretary of State.  First, LLC’s need to update their officer information each year on the Public Information Report which is filed with the Texas Comptroller of Public Accounts. This information is then sent to the SOS and the records are updated. Next, even though amendments are not required, it’s a good idea to file an amendment to update management information with the SOS, which the form is found here – https://www.sos.state.tx.us/corp/forms/424_boc.pdf.

What is the best way to handle my getting paid? Should I receive payroll from the LLC as an employee?

I am a 50% partner in an LLC (it has one other partner who also has 50%). Only I will get my regular pay/fees from the LLC. After that pay and all other expenses, my partner and I each own 50% of the profits.

What is the best way to handle my getting paid? Should I receive payroll from the LLC as an employee? Or should I be an independent contractor and receive a 1099? If it is possible for me to get a 1099, then that would be beneficial as I have many other expenses associated with my work for the company that would be eligible for tax deductions.

Our Response – By working for the LLC there are two ways to be paid which would be as a salaried employee or an independent contractor. If you are an employee, there is an additional payroll expense. If you receive 1099 income, this income would be reported as self-employment and would be taxed as such. In most cases being classified is going to be taxed lower than as an employee since the payroll taxes won’t have to be paid.

If you have a separate business that is performing the work for other clients in addition to the LLC though, you should be ok, but we would recommend double checking to be sure it is eligible as an independent contractor, otherwise there could be issues in being incorrectly categorized (See IRS info on Independent Contractor vs Employee)

 

Do you have any information about the legal protection of a single member LLC in Illinois?

Do you have any information about the legal protection of a single member LLC in Illinois?  I was asking because someone told me that the single member LLC in Illinois doesn’t have any type of protection from the legal point of view, but the multiple members LLC does have legal protection from your assets.

Also, how can I get a resale number in Illinois? I am buying blank items, then I embroider them and sell them in my shop, but some suppliers are asking me for my resale number.

 

 

Our Response: The LLC provides protection between your business and personal assets.  The LLC is a separate legal entity, so in the event of the LLC being sued, your personal assets should not be at risk, provided the LLC activities weren’t negligent, etc.  There isn’t any differentiation between a single vs multiple member LLC.  The same form is filed regardless of how many people are a part of the LLC.  There are some states that do not allow single member LLC’s but Illinois does.

When you signed up for the Illinois business tax number, you would have received a 8 digit number and resale certificate which allows the vendor to not collect sales tax.  Some vendors will just ask for the number, others will want a copy of the certificate and some may have you fill out a form –http://tax.illinois.gov/taxforms/sales/crt-61.pdf.

 

 

One member of a two member LLC received a 1099 payment. The check and 1099 was made out to the member personally – not the LLC. Can this “personal” 1099 be included in the LLC as income?

One member of a two member LLC received a 1099 payment. The check and 1099 was made out to the member personally – not the LLC.  Can this “personal” 1099 be included in the LLC as income? The payment is related to the LLC’s purpose and mission.

 

 

Answer – The short answer is yes, but it’s not recommended.

LLC’s are typically created to separate business and personal assets.  Even though the work may have been legitimately for the activities from the LLC, may call that separation into question should there be an audit.  Should the LLC ever be audited or sued, several factors will be evaluated, one of which is including the separation of business finances from the owner’s finances.  This point becomes more important if the LLC is taxed as a corporation vs partnership or sole proprietorship.

You have two options for endorsing the check that was paid to the partner rather than the LLC.

  • Write “For Deposit Only” along with the LLC’s name and account number. This is considered as a restrictive endorsement where the check can only go through the LLC’s bank account under your name.
  • Write “Pay To” along with the LLC’s name and having the partner sign their name. This is called a special endorsement where you are essentially giving the check to another “person” (in this case the LLC) to deposit in this other “persons” account.

While this isn’t ideal, the funds can be deposited with the LLC. Just try to not make it happen often so the LLC’s liability protection isn’t put at risk.

Can I own an LLC filed in a different state than I live in to run my online business?

Can I own an LLC filed in a different state than I live in to run my online business?  When you are filling out the federal tax ID form, do you put doing business in the state for that LLC, or the state you live in – especially for a drop shipping/affiliate type business that is 100% online?

 

Answer

The big question is what is the tax structure of the LLC?

I’m assuming you’re setting up single member LLC and I would guess you’re probably using a default partnership tax structure. In that case, the net income will flow through to your personal return. If you live in a state that has a state income tax, you will pay your home state income tax on the net income. Most people are setting up LLCs in states like WY, DE etc. that don’t have personal income tax, so figuring out whether you’re on the hook for taxes in two states is probably not an issue, especially if you don’t have operations or other nexus to the LLC state of formation. You might be on the hook for a smaller tax item like a franchise tax.

If you elected to have the LLC taxed as a C-Corp, then you would potentially be on the hook for state corporate tax in the state of the LLC’s formation if applicable. Again, most people are not setting up LLCs in states with personal or corporate income taxes.

Do you have to register as a foreign entity doing business in your home state?

If you’re just working from home and don’t have an office, warehouse, etc. in your home state, you can probably get away with not registering because it’s debatable whether you’re doing enough business activity to warrant the registration. Oversight on this is usually pretty minimal. Also, even if you have to notify your state tax authority of your business earnings and presence to pay a state income tax, they usually don’t talk to the secretary of state’s office and don’t use the same systems, so disclosure to tax authority won’t necessitate registration as foreign entity. The old school, safest answer would be to go ahead and register as a foreign entity + get any local businesses licenses (either state or county), but up to your own risk tolerance. Penalty for not registering is usually past fees + penalty payment and you don’t get certain benefits like the ability to sue another company within the state.

Registered agent address vs. mailing address

You need a registered agent in the LLC state of formation but not your home state. The registered agent may or may not provide mail scanning/forwarding services. You can set up a mailing address at your house, a P.O. box, or a virtual office and use that for business mail. The registered agent will receive some official documents like your EIN, possibly initial bank documents. You could use the registered agent address to sign up for other business accounts but you would want to use the mailing address for most other purposes if someone would need to contact you by mail.

Sales tax, warehouses, etc.

There can be issues surrounding these items that it would be good to talk to an accountant who’s familiar with Amazon businesses.

 

I Want To Add An Owner To The LLC. How Do I Do That?

I Want To Add An Owner To The LLC.  How Do I Do That?

– Vanessa

 

Answer

Adding a new member to an LLC is typically an easy process in most states, however there are some states that require dissolving the LLC and reforming if there is any change in ownership.

First you will want to review the operating agreement to see if there are specific procedures that need to be followed. Many LLC’s don’t have an operating agreement since they operate as individual owners, which is fine, but if you do have one be sure to review it. That being said, if you don’t have one now, you will probably want to form one to outline each owner’s rights & responsibilities in addition to profit sharing. It’s much easier to hash this out now, rather than later when disputes arise.

If you have an operating agreement, you would need to prepare an amendment to add a new member to the LLC. This amendment should include the new member’s name, amount of investment, percentage ownership in the LLC and percentage of profits and losses from business operations that will be distributed. Members then vote on the amendment.

Last, be sure to look at how the LLC is taxed and whether you need a new FEIN number. LLC’s can be established with a social security number if they are taxed as a sole proprietorship. You can get a FEIN number at no cost from the IRS.

 

Can A Husband & Wife With Separate Businesses Share An LLC?

My husband and I are both self employed. My husband just started a contract job and I have a small sewing business. Can we share an LLC even though our businesses are separate entities?

– Susan

Answer

You are able to operate multiple businesses under the umbrella of one LLC to get the liability protection and as an added benefit, will only have one tax return to file. If you are going to continue doing business under the existing sole proprietorship business names, lets say its “Susan’s Sewing” for example, you will need to file an assumed name notice form (also known as doing business as, DBA, etc) with the county you run the businesses out of.

You will also need to get a FEIN number and state business tax number for the LLC.

 

 

Georgia LLC and Social Security Benefits

 

My husband and I are partners in a LLC co.  I will be 62 years old next year and plan to file for my social security.  I need to remove my name from the ownership of the llc, so that the income will not be charged to me.  I understand in GA, a withdrawal form is required.

– Theresa, Georgia

 

Answer

There are several factors that may impact the amount of retirement benefits.  Social Security benefits will not be reduced no matter how much you earn once you reach full retirement age. If you were born 1942 or earlier you can receive full Social Security benefits at age 65. If you were born between 1943 and 1960, full retirement age increases incrementally until the recipient reaches age 67. After attaining age 66, you can earn any amount & still collect full Social Security benefits.

As an example, if you file a joint return and both you and your spouse are past the full retirement age and a combined income of between $32,000 and $44,000 is reported, you may have to pay income tax on as much as 50% of your benefits. If your combined income is more than $44,000, as much as 85% of your benefits may be subject to income taxes.

To maximize after-tax income if you are a single individual (or head-of household) you would want to keep your earned and unearned income plus one-half of your Social Security benefit under $25,000 total. If you are married, you would want to keep the same resulting jointly computed figure under $32,000. This would keep any of your Social Security benefits from being taxable.

There is no requirement to list members and managers with the Georgia Secretary of State so there is no filing to change them.  The only filing you may have to do is if you are the registered agent and that change would be made with the annual registration.

Filing LLC In California. Can I Delay The Date Of Formation To Next Year and Save On Filing Fees?

I am currently in the process of starting an LLC in California. If I file the articles of in corporation papers (LLC-1) with state this year(November/December) can I delay the effective filing date of the LLC to January 1st of next year in order to avoid the $800 minimum annual tax fee associated with the LLC( I am not selling any goods or services at the moment but plan to early next year). If so is there a separate form I also need to submit at the time I submit the LLC-1 to the state?

– Roy, California

 

 

Answer

Hi Roy

If you delay filing the Articles of Organization until after December 17th and doing no business until the following year, you will avoid paying the current years filing fee.   Filing before 12/17 or filing after 12/17 and having business activity and you will have to pay this year and again next year, regardless of whether any business is being generated.

Adding A New Member To An LLC

I started my LLC in 2015, and I got an EIN for single-member. Now I need to add my dad to the LLC. So, I am going to get a new EIN?

Do I need to file form 8832 to notify them of the change from proprietorship classification to partnership-classification.

Since, partnership-classification is the default for multi-member do I need to file this form, or is getting a new EIN sufficient.

– Chirag, New Jersey

Answer

You don’t need a new EIN when you add members to an LLC (unless you never got an EIN for your LLC and were simply using your personal Social Security Number).

Merely changing tax classifications does NOT require a new EIN.

You will have to change your tax classification (using Form 8832 as you mention in your question) from single member disregarded entity to a multi-member LLC (partnership taxation).

From now on, you’ll be filing 1065 partnership returns, and giving each member (yourself and your dad) a K-1 from the 1065 stating your share of profits or losses to report on your own 1040.

When you add a new member to your LLC, be sure to document this in your written Operating Agreement. At the very minimum, you should document the following in writing:

  1. The consideration paid by the new member for admission to the LLC (e.g. money, services to be performed, contributions of equipment or real estate, etc.);
  2. The amount of membership units being acquired (i.e. “shares” of the LLC);
  3. The effective date of the transaction;
  4. Voting rights of the new member (are they proportional to the new member’s interest or is the new member passive with no voting rights?);
  5. Whether existing members have a right of first refusal to purchase the new member’s shares if one day he wishes to sell his membership units and how price of those shares would be calculated.

All of the above, and more, will be described in your new Operating Agreement: how membership units (shares) are allocated between you and the new member, how profits and losses are allocated, whether a member can sell his/her shares to an outsider without offering the other members right of first refusal, and many other issues.

Logistics of Adding a New LLC Member

While you are legally allowed to draft your own Operating Agreement without a lawyer, there are probably many issues you wouldn’t think of on your own. For example, how many of the five issues listed above did you think about before I listed them for you? Probably not all of them.

Therefore, it is a good idea to get some help with your Operating Agreement.

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File My LLC As A C Corp Or Sole Proprietor?

I am a single member LLC, no employees. I filled out my tax forms using the 1040 and sched C and sched SE, and discover that I must pay a hefty amount in taxes.

I am thinking that I should file as a C corporation to see if that would be beneficial to me. What line on my 1040 should I report the income from the corporation – or what sched should I use to report the income from the corporation?

In general, what corporate and personal forms and schedules should I use if I choose the C Corporation route?

– Barbara, D.C.

Answer

You’re going to have to convert your LLC to a c-corporation or elect to have your LLC taxed as a corporation. Changing your tax election after operating the business can result in large tax penalties. You’ll need an accountant on this one.

And you’re probably not going to save as much as you think.

As a c-corporation, your LLC will pay corporate income tax on the LLC’s income, which is currently at a rate of 35%. The LLC’s income would no longer be reported on your 1040, instead, it would file its own tax return and pay the 35% corporate tax rate. By comparison, your personal rate might be lower than 35%.

Second, if you want to pay yourself from your c-corporation, you’ll have to go through the whole withholding payroll exercise in addition to paying taxes on your salary (reported on your 1040 just like salary from any other employer would be reported). In terms of employment taxes, the LLC pays half your FICA and Medicare taxes, with the other half withheld from your paycheck.  If you’re looking to avoid paying self-employment taxes, converting to a c-corporation will not help you.  All you would be doing is chopping self-employment taxes into 2 pieces–one paid by your LLC and the other paid by you.

Finally, if your corporation has money left over after paying corporate taxes, and paying you a salary, it can then issue you a dividend.

And you’ll pay taxes (on your personal return) on that dividend. That’s the “double tax” for corporations.

But I would first consult with an accountant to see if you’d really save much by converting to a c-corporation before you spend time and money on conversions.

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A Beauty Salon Owner Wants To Form A Single Member LLC

If a cosmetologist decides to purchase a salon and forms a a Single Member LLC would she continue to use schedule C for both her income as a cosmetologist working in the same salon and income from the Single Member LLC.

The salon is set up by where the income is produced by renting booth space to cosmetologist that are independent contractors.

Would she have to pay booth rent to the LLC her self since that is the way the LLC produces income, or is that commingling funds? This salon will have no employees.

– Shelia, Indiana

Answer

I would suggest having the salon owned by the LLC…that way if someone is injured at the salon, the owner is the LLC, and not the individual.

The individual would then pay booth rent to the LLC. That is NOT commingling. In fact, not paying rent, and simply treating LLC property as her own would be evidence of commingling assets.

Remember–you and your LLC are separate entities. Would you let your next door neighbor use the LLC’s booth without paying rent? Then what gives you the right to use the booth without paying rent?

This is a common arrangement.

XYZ, LLC and ABC, LLC are both owned by John Smith. XYZ owns the real estate, which it leases space to the operating business ABC. ABC pays rent to XYZ. XYZ distributes the rent to John Smith. John Smith also keeps any profits from ABC, the operating business.

The advantage to this method is that you can reduce your self-employment taxes in the operating business…as your income from the LLC that only collects rental income is not subject self-employment tax (there are exceptions to this, so get good tax software that explains the differences).

Furthermore, just like your company wouldn’t rent the booth to your neighbor on a handshake (you would use a written lease), the LLC should have a written rental agreement with each person renting a booth.

I know it might seem weird to “rent the booth from yourself”, but understand that the whole point of incorporating is that the company is not you. It is a separate “person” in the eyes of the law.

As far as taxes are concerned, as a single member LLC, you’d use the Schedule C on your 1040 form to report your income (unless you choose taxation as a corporation).

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Do I Need A Registered Agent For My LLC?

Here is my case
I will be the only owner and employee of my LLC , LLC will be in Dallas,TX
It would be an IT Staffing company LLC address is going to be my apartment address in Dallas Texas.

Question

1. What registered agent means ? What he do ?
2. Do i have to have one?
3. Can I be my registered agent
4  Do i need Operational agreement as i m the only member
5  If so where do i need to send it i mean what to do with that agreement
6. What is veil Piercing ? LLC owner have to worry about it ?
7. How difficult to form an LLC by my self . What an advantage to hire a lawyer or do it online with any other company like LZ

Thanks

– Kalia, Texas

Answer

1. A registered agent (aka resident agent) is the person assigned to receive service of process for your LLCs. A registered agent located in the state of Texas is required for every Texas LLC.

You can act as your own registered agent if you choose.

2. See above. Yes, your LLC is required to have a registered agent.

3. See above. You can act as your own registered agent. The list of registered agents is public information, and therefore you will get lots of junk mail after forming your LLC if you are your own registered agent.

4. Most states do not require a written Operating Agreement. If you fail to create an Operating Agreement, your LLC will be subject to the default laws under Texas’ LLC act.

It is a good idea to have an Operating Agreement, even for a single member LLC.

5. Operating Agreements are not filed with the State, but are instead private contracts governing the management and operation of your LLC.

6. Veil piercing is when a judge allows a creditor of your business to seek a judgment against your personal assets, on the basis that your LLC is actually no different from yourself. The legal term is that your LLC is an “alter ego” of the owner.

Factors for veil piercing include commingling of business and personal funds, fraud, zero capitalization of your LLC, ignoring LLC formalities, and fraud.

Every business potentially has to worry about veil piercing, not just LLCs. The important things to remember are that you should follow corporate formalities (which is relatively simple with an LLC compared to a c corporation–Legalzoom’s LLC formation service includes guides on maintaining your LLC legally), not commingle funds, and not commit fraud.

Be sure to sign all contracts on behalf of your LLC as “John Smith, Member of XYZ, LLC”, and not as “John Smith”.

7. Filling out an Articles of Organization form for Texas is not particularly difficult, depending on how familiar you are with completing government forms.

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Should I Add My Non-Participating Spouse As A Member To A New LLC

I am planning to start a service business that I will operate independently. My wife will not formally participate in the business except as an informal adviser. I’m stuck on the question of whether to add her as a member or not, and if yes, at what capital contribution level.

Are there tax benefits and estate planning benefits (what happens to the LLC if I die) to adding her now as a member? Note, all of our personal funds are held jointly, so capital contribution I provide is really from both of us.

Thank you for any insight you can give.

Regards,
– Jim, Minnesota

Answer

For a married couple filing joint tax returns, I don’t really see how adding your spouse as a member will cut your taxes.

I really am not knowledgeable enough on estate planning to tell you if there are estate planning benefits. What I remember from studying for the bar exam is about enough to be dangerous 🙂

In terms of what happens to your LLC interest when you die, it, like all other assets, passes into your estate to be distributed according to your will (if you have one), or according to the laws of the state where you resided at the time of your death.

This is called probate, and it involves the courts and, depending on your state, can be a 6-12 month process or longer if there is a will contest.

You should take a look at placing your LLC membership interest in a living trust so that your wife can take ownership of it in the event of your death without having to go through the probate process.

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Are LLCs Appropriate For Holding Title Of Rental Property?

I am considering re-titling some rental houses with each having its own dedicated single member LLC whereby the LLC’s lone member (owner) would be my existing consolidated taxpaying multi-member LLC (partnership). The houses already have their own bank accounts and could easily include EIN numbers as well. Hopefully this would give me asset protection and natural flow-through. Does this layered configuration make sense, and how do I insure the process does not ‘dirty’ the property titles for subsequent disposition of the houses?

In my state – Georgia, LLCs are relatively inexpensive $100/$30 if self-created, however Foreign LLCs, i.e. Nevada Series LLCs which look good on paper are expensive to register here. TIA

– Jack, Georgia

Answer

LLCs are excellent for real estate. Your “layering” concept is very good as well. This is how many of the big players do it.

Some of them have separate entities for 1.) holding the real estate and 2.) managing the real estate. This makes particularly good sense in states that don’t charge an annual LLC fee/tax (sorry Californians–you have an $800 annual LLC tax).

They are superior to corporations in that the paper losses generated by real estate’s depreciation deduction flow through to the individuals that tax year, rather than staying within the corporation and having to be carried forward.

A tax deduction now is worth more than one in the future (time value of money 101).

The best way to keep the process “clean” is to use a good law firm that does real estate. In a city like Atlanta, there are plenty of firms of under 50 lawyers (which would be a small firm in Atl) that specialize in real estate. Don’t go to a family law (divorce) or criminal lawyer!

You can form the LLCs yourself an save a few bucks, then go to them to make sure the transfer of the titles is done correctly.

This also gives you a chance to test drive a law firm.

In commercial real estate, you’re going to need a good law firm.

From transactional work in negotiations in financing, permits and variances, and leases to litigation with tenants, contractors, insurance companies (yes, insurance companies don’t always pay just because you make a claim!), and condemning authorities….there is a lot of legal work generated from commercial real estate.

I don’t see any advantage in going for a foreign (i.e. Nevada) LLC.

You wouldn’t avoid any taxes (unless you were taxed as a corporation, which is generally a bad idea for real estate), you’d still have to register in Georgia (extra cost, loss of privacy that many seek by going to Nevada), and you’d still have to litigate in Georgia because your property is located there and the opposing party in litigation involving your property could put you in a Georgia court on that basis

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Why Does My Bank Refuse To Move Property Into LLC?

I opened an LLC for the purposes of owning rental property. However, after forming the LLC and asking the bank about it, the mortgage bank indicated that they do not allow the transfer of the loan into an LLC (Wells Fargo). What should I do? According to my lawyer, this is more and more common these days. I know there is a difference between transferring the loan and transferring the title into the LLC. Is there anything I can do?

– Rob, North Carolina

Answer

It’s the due on sale/ due on transfer clause that is gumming up the works.

In practical terms, you need to find someone at the mortgage company with authority to transfer the loan. This is probably difficult, because all these loans have been collateralized and securitized by Wall Street and nobody really knows who owns what.

Your best bet is to try to find a company that will refinance the loan in the LLC’s name–basically selling the property from you to the LLC. The problem is there might be tax consequences (talk with your lawyer), plus whoever refinances the property will probably want a personal guarantee from you on the mortgage.

In the old days, when banks held mortgages themselves and Wall Street wasn’t involved, you might have been able to work this out if you had a good relationship with the banker. Today, it’s a real pain, and you’ll need to get creative (or get a creative lawyer).

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Which Is Better – Single-Member LLC Or Multi-Member LLC

My wife and I are considering starting a business in Arizona providing therapy services to children. We have chosen to form an LLC and are not sure whether to classify as multi-member or single member. We have read numerous letters and blogs indicating advantages and disadvantages for each and still remain undecided. What do you think is the best option for us?

– Ryan, Arizona

Answer

The first question you need to answer is whether you both want to be owners of the LLC, or just one.

Obviously, a single member LLC is the way to go if just one of you wants to own the LLC.

If you both own the LLC, then it’s not really “single member” anymore. However, as a husband and wife as to sole owners, you can elect disregarded entity status and avoid having to file Form 1065.

Instead, all your profits and losses would be recorded on your Schedule C of your 1040 (the “normal” tax return you file each year).

As far as whether you should both own shares in the LLC…

There are probably family law (e.g. in the event of divorce) considerations to who owns shares in the LLC, though it gets very complicated, and I’m not familiar with Arizona family. My understanding is that many western states are community property, which is different from what we have here in Missouri. Therefore, any family law issues would have to be addressed by an Arizona attorney.

On a general note, in terms of asset protection (after incorporating), your best bets are to:

1. Have adequate insurance;

2. Don’t be negligent.

The perception in the media is that any idiot plaintiff’s lawyer with a copy machine can win multimillion dollar verdicts on nothing more than a trip and fall.

The reality is far different.

You are more likely to be impoverished in business through employee fraud/embezzlement, lawsuits by your partners/investors, or lawsuit with suppliers and customers than to be bankrupted by a slip and fall plaintiff.

So, while incorporation makes logical sense, it’s important to purchase quality liability insurance. Then when there is a lawsuit you can hand the whole matter over to the insurance company’s lawyers.

Particularly because your business is dealing with children, having adequate insurance (at least $500,000 – $1,000,000) in case a child is injured is essential. Any plaintiff’s lawyer will take the insurance money over having to chase you personally into bankruptcy.

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Is A Business License The Same As An LLC?

Since I’m going to be opening a home based business, is forming my LLC the same as having my business license or is that something separate I also have to obtain?

– Jackie, Missouri

Answer

A business license is something issued by your municipality. Business licenses usually apply only to businesses that are open to the public in some way–typically, storefront businesses.

Many home-based businesses do not need a business license.

For example, if you’re selling goods on ebay from home, you probably don’t need a business license. If you’re running a website-only business, you probably don’t need a business license.

On the other hand…

If you’re operating a child daycare facility out of your home, then yes, you probably will need a business license (along with other government licenses).

If you don’t mind sharing, what type of home based business are you operating?

I might be able to help you figure out if you even need to contact your local municipality to obtain a business license.

Furthermore, if you live in a neighborhood with a homeowner’s association, you HOA bylaws typically have rules and regulations regarding operating a business out of your home. In practical terms, your neighbors won’t likely know that your business even exists if it’s purely internet or mail order based and you don’t have lots of cars and traffic at your door front.

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Can An LLC That Owns Real Estate And A Business Also Be The Same LLC For A Self-Directed IRA?

I am interested in putting my assets–thus far two parcels of land–into an LLC as a holding company. I would also like to open my own advertising business, and put that into an LLC. Additionally, I would like to roll over my current 401(k)plan into a self directed IRA LLC. Can all of these be housed under the same LLC umbrella?

I do not want all of the funds I have, obviously, to be in the name of a retirement fund. I’m thinking that I need at least two LLCs legally. Can you please offer advice or an opinion?

– Lou, California

Answer

I don’t give legal advice here, however, I can answer a few of your questions.

But first, I need to ask why do you want your IRA in an LLC?

Your assets in an IRA are fairly well protected against creditors, and in bankruptcy. Did someone suggest to you to put your IRA in an LLC for estate planning or other purposes?

As far as your land and advertising business, you definitely want those separated into two LLCs.

You almost never want real estate (particularly developed real estate, but also land) in the same entity as your operating business.

The risk of liability crossing from one business/asset to the other is very great.

A problem in your advertising business can result in your losing your land, or vice versa, if all those assets are in a single LLC.

Land can be contaminated, for example, and the environmental laws hold the owner responsible even if the contamination is the result of other people dumping toxins on your property in the middle of the night! I once had a client who was threatened with millions of dollars in cleanup costs from the state government because the city had once operated a landfill, which leaked, on my client’s property. Even though the city was at fault, the state forced the client to pay for remediation, and it was up to the client to seek reimbursement from the city. Fortunately we worked out a settlement, albeit after significant legal fees. The last thing you want to do is expose all your assets to that type of risk

If the real estate is to be used by your business, the simple solution is to have your real estate LLC lease the land or building to your business LLC. This also allows you to move money around between entities for tax purposes, although that is a more advanced topic to discuss with a CPA.

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Can A Non U.S. Person Be A Member Of An LLC?

Can a non-us person be a member of an LLC?

– David, Florida

Answer

Yes. Unlike S-corporations, LLCs can have non-US citizens as members. If you wish to have your LLC taxed as an S-corporation, then obviously, no non-US members are allowed (and the LLC must follow the other S-corporation requirements as well).

In fact, pretty much any entity can be a member of an LLC, including:

  1. A US citizen.
  2. Non-US citizen.
  3. An LLC.
  4. A corporation.
  5. A trust.
  6. A partnership.

Other Questions about who can be an LLC Member: Can a member be a foreign limited company?

I have formed a LLC company and I need to include a member’s name. Can this member a foreign limited company? –By Bernard, Columbia, Mo, USA)

Answer

Foreign LLCs can be members of another LLC. Unlike, for example, S-corporations, there are no restrictions on the type of entity the member of an LLC can be.

Any of the following can be a member of an LLC: individuals (both US citizen and non-US citizens), trusts, corporations, LLCs, partnerships, limited partnerships.

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Can A Single Member LLC Elect To Expense Organizational Costs On Their Individual Tax Return?

When an individual incurs organizational costs while setting up their single member LLC, are they able to elect to amortize and/or expense organizational costs through the Schedule C (1040). My research seems to indicate this option is only available to corporations, partnerships, and trusts.

Answer

My research did not get a clear answer, however, the general principal is that business expense deduction are the ordinary and necessary expenses related to running a business.

Incorporating a business is necessary and ordinary–millions of businesses are incorporated–so I don’t see how the IRS could object to the business expensing organizational costs.

Particularly in a Schedule C situation, you can take all business deductions for unincorporated businesses (sole proprietorships), so either you can take it “individually” or through the LLC.

Because the LLC’s taxes are passed through regardless, the total tax you pay is the same provided you take the deduction once–either as an a business expense when your business was unincorporated, or as a business expense when the business was incorporated.

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Can A Trust Be The Single Member Of An LLC In Illinois? If So, What Are The Practical Considerations, Advantages And Disadvantages?

Can a trust be the single member of an llc in Illinois? If so, what are the practical considerations, advantages and disadvantages?

– Mike, Illinois

Answer

Yes.

Illinois permits single member LLCs, and a trust (including a living trust) can be that single member.

As far as the advantages and disadvantages, you’d probably need to speak with an attorney or CPA.

One possible advantage with the living trust is to keep your LLC out of probate in the event of the single member’s death, and instead have ownership transferred via the living trust. However, you’re going to need professional help with this more complex situation.

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Can An Illinois LLC Be Formed To Hold Property Located In New Jersey?

Can an Illinois LLC be formed with members from both Illinois and another state for the purpose of owning real estate located in New Jersey, or does the LLC have to formed in New Jersey where the property is located?

– Amy, Illinois

Answer

You are asking two questions, really.

1. Can an out of state LLC own property in state?

2. If an Illinois LLC can own property in NJ, does it have to jump through any additional regulatory hoops, such as registering as a foreign corporation in NJ?

The answer to 1 is yes. An Illinois LLC can own property in NJ.

The answer to 2 is whether your Illinois LLC must register as a foreign corporation in NJ because it is “transacting business”.

Here is what NJ law says about what constitutes “transacting business”:

      (2) Without excluding other activities which may not constitute transacting business in this State, a foreign corporation shall not be considered to be transacting business in this State, for the purposes of this act, by reason of carrying on in this State any one or more of the following activities
      (a) maintaining, defending or otherwise participating in any action or proceeding, whether judicial, administrative, arbitrative or otherwise, or effecting the settlement thereof or the settlement of claims or disputes;
      (b) holding meetings of its directors or shareholders;
      (c) maintaining bank accounts or borrowing money, with or without security, even if such borrowings are repeated and continuous transactions and even if such security has a situs in this State;
    (d) maintaining offices or agencies for the transfer, exchange and registration of its securities, or appointing and maintaining trustees or depositaries with relation to its securities.

NJ law also has this interesting statute that might apply in your situation:

      14A:13-1. Holding and conveying real estate
    A corporation organized under laws other than the laws of this State, whether or not constituting a foreign corporation as defined in this act, shall have the same powers with respect to real property located in this State, or any interest therein, as a domestic corporation.

Seek the advice of a NJ attorney to determine if your Illinois LLC must register as a foreign corporation in NJ.

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Can an LLC Pay Members an Hourly Wage that Varies on a Project-to-Project Basis?

Can an LLC pay its members an hourly wage, which is tied directly to the number of service hours contributed to the enterprise, and perhaps even to a percentage of the actual money brought in on a given money earning project? Can these hourly payments be considered “guaranteed payments,” in the same way that a flat salary paid to members would be?

Here’s the situation: my friends are starting an LLC to provide web design, programming, and multimedia services to business clients. One member is a designer, one is a multimedia specialist, the third a programmer. They anticipate that the amount of money they will bring in, and how much of that money is due to the contributions of any one of the three contributing members, will vary widely depending on the project. Some varying factors would include:

(1) The hourly rate charged to clients for design, multimedia, and programming components will depend on the complexity of the project. A different hourly rate would apply to each component. So for instance; a job may demand complex programming but easy multimedia, and so the programming rate would be set much higher than the multimedia rate.

(2) Also, there could be projects that demand, for example, many more hours of labor from the designer than of the multimedia specialist or programmer, and vice versa.

Basically, they are struggling with the issue of how to set up a compensation system that guarantees each member a fair return for their contributions — which may, depending on the jobs they get, end up being grossly disproportionate to other members’ contributions.

– Eliana, North Carolina

Answer

You have a complicated setup here, but it is possible.

Guaranteed payments are the way in which LLC members are compensated for their labor contributed to the LLC.

I have seen LLC operating agreements where members agree on a set guaranteed payment for each member, with bonuses determined at the end of the year based on productivity of each member. This is common among professional practices (medical offices, law firms, etc.)

In a law firm, for example, each member/partner would take a year-end bonus based on some formula related to billable hours. In a medical practice, it could be based on revenue generated from patient billings minus the member’s proportionate share of expenses.

I would think a similar model could apply to web development.

While nearly any conceivable compensation arrangement can be written into your operating agreement, the important thing is that what is written is what each person had in mind.

Secondly, you’re going to want quality accounting software that lets all the members see exactly what their efforts earned and what expenses were associated with their earnings.

For example, you could have a business where one member brings in 50% of revenue, but uses 80% of expenses. He might claim 50% of profits, but the other members might object, pointing out that he generated more expenses than revenue, and therefore should be entitled to a smaller share.

You need to decide:

1. How revenue is counted.
2. How expense are allocated between the partners.
3. How to value “intangible” value added to the company.
4. When this performance based compensation is paid (at the end of each month, annual bonuses, etc.)

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Can A C-Corp Own an LLC?

Can a c-corporation be the sole member of an LLC and if so how report income/loss…..

Answer

Yes, an LLC can have a C-corporation as its member.

The LLC’s income would pass-through to the c-corporation. The c-corporation would report the profit/loss on its own tax return.

Remember that unlike LLCs, a c-corporation files its own tax return separate from its owner(s).

I would suggest speaking to a professional (attorney / accountant) when you start getting multiple entities involved and co-owning one another.

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Can I Get Out Of An LLC And Leave My Partners?

I believe I am listed as 50% owner in a business that is falling apart. We have nothing in writing except for our articles of incorporation that list me as director below the husband (vice-president) and the wife (president). We had verbally (in front of their friend, our accountant) agreed to pay me $80,000 per year plus split the remaining profits. In 2008 they have paid me a total of approx $24,000 and spent the rest on paying down loans, lines of credit, etc and leave nothing for me to live on. I told them they need to pay me and they say there is no money, but yet pay our front office manager more than me in 2008 and have given her bonuses on top of that.

I have decided to take a paying job as an employee so I can support my family. Is there anyway I can get out of this LLC if they refuse to sell the business to my new employer?

– Will, Wisconsin

Answer

First, you’re going to need to speak to an attorney in Wisconsin (I’m assuming the LLC is a Wisconsin LLC and the other members are Wisconsin residents).

Depending on Wisconsin law and what is written in your LLC Operating Agreement (if you have one, that is), you might be able to exit the LLC by filing a few forms.  The formal term for exiting an LLC as a member is called “withdrawal”.

It could also be that you are a director without actually being a member of the LLC. In that situation, you can probably simply resign as a director. You’ll have to check the LLC’s operating agreement and/or Wisconsin law to see the procedure for a director resigning.

In order to recover the compensation you say you are owed, you’re probably going to have to sue. Given that you only had a verbal agreement, your lawsuit will be more expensive to prosecute and the chances of winning slimmer.

This is why people need to have written operating agreements.

If you need additional customization, you can take this document to a local lawyer familiar with closely held businesses and he/she can work from it. You will more than make back the $99 spent through savings in legal expenses by not having your attorney start from scratch.

Even if you’re simply working for an LLC, and not a member, you need a written agreement.

Everyone out there reading this, please learn from this reader’s experience–get business done in writing!

When you by $5.00 worth of batteries at Walmart, they give you a written receipt.

But when people do deals involving tens of thousands of dollars, they do it verbally.

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Can I Insure Multiple LLC’s Under The Same General Liability Policy?

I have multiple rental properties I want to put on one insurance policy. Can I do that?

Answer

Ask your insurance agent about this one. I have talked with a couple of insurance agents and they typically do not due to the complexities of pricing such a policy, but other brokers may have policies to insure multiple entities on a single policy.

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Can I Start A Second LLC From The Same Home Office I Am Running The First LLC From?

I already have an LLC that I am running from a home based office, with myself listed as registered agent at same address. Can I start a second LLC and run it from the same address and home office and list myself as registered agent at my home address for the second LLC in the same way I did the first? Would this pose any problems?

Answer

Yes you can:

1. Have the same person as the registered agent for many LLCs (and corporations, too).

2. Have many LLCs sharing the same address.

One caveat is that if you want to keep liability separate for these multiple LLCs, be sure that you treat them as separate entities. That means that they each have their own bank accounts (obviously), if one entity owns a piece of equipment, the other entity doesn’t use it without paying a rental charge, don’t mix money between the two (don’t deposit a check made out to LLC A into LLC B’s bank account, for example).

It is not uncommon at all for many different companies to all use the same address as their registered agent address.

One notorious example is 1209 North Orange Street in Delaware. According to a New York Times article, there are more than 285,000 (yes, more than one quarter million!) companies “headquartered” at the nondescript, one story office building.

  285,000+ corporations and LLCs are headquartered at this single location in Delaware.

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Can I Use A P.O. Box As The Primary Address For My LLC?

Can I use a P.O. box as the primary address for my LLC? I am looking to incorporate in Pennsylvania.

Answer

Most states, including Pennsylvania, require a street address (not a PO Box) for the LLC’s registered agent / resident agent. There are services such as UPS Stores that give you a real street address, and you refer to your box # as “Suite 123”.

For all other purposes, a PO Box as your LLC’s business address is usually acceptable.

Business address and registered agent address are two different concepts. A business address is where your business is located, such as a storefront or office.

A registered agent address is typically either your business address, your attorney’s office, or a separate company that acts as your registered agent.

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Can One Member Also Manage The LLC To The Exclusion Of The Other Members?

I would like to set up an LLC where I also retain final decision making on all issues. Is this possible. If so, is it accomplished by designating myself as also the manager? Or do I simply set it up as a member run LLC but then clarify management issue in the operating agreement, or something else entirely?

Answer

How the LLC is managed day to day is determined by the operating agreement.

If you don’t have an operating agreement, then your state LLC statute determines how your LLC is run.

Therefore, it is crucial that you have a written operating agreement specifying and detailing how management decisions are made. Mere designation as manager might not be sufficient.

The most comprehensive and safest solution would be to form your LLC and prepare a limited liability company operating agreement.

Answer the questions asked of you in drafting the operating agreement.

The next step is to take the operating agreement created for you to a local lawyer who specializes in small business transactional matters and have him/her review it and make any needed corrections.

This will be FAR less expensive than having an attorney draft your operating agreement from scratch.

You get the best of both worlds–cost effective legal work from a document processing company, combined with the security of knowing an actual human lawyer has reviewed the document.

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Can You Have A Separate EIN # For Different DBA’s Under The Same LLC?

Can you have a separate EIN # for different DBA’s under the same LLC?

Answer

No. You don’t want to (and are not allowed) to do that.

A DBA is not a separate entity. It’s just a way of letting the state and the public know that the LLC also does business by other names.

Only a separate entity can have a separate EIN.

There are some unscrupulous promoters out there telling people that they can eliminate a bad credit history, for example, by getting EINs under various business names.

This type of scheme won’t work for a variety of reasons, and I don’t want to get started on a rant, because this is very fraudulent and people unknowingly get caught up in it.

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How Do You Record Capital Contributions In An LLC?

Would it be sufficient to write “capital contribution” or “start up” on the memo line of your check from your personal account in terms of documentation or should you draw up a contract in terms of start cost and ongoing company expenses until you make a profit?

Answer

If this is a single member LLC, then you can probably get away with simply writing “capital contribution” on the check for startup money.

If you are a member of multi-member LLC, you need to have an operating agreement and make sure that it addresses what happens to your capital contribution to protect your rights vs. the rights of the other members in the LLC to a return of the capital contribution.

For example, say you make a $10,000 capital contribution to the LLC and you have 3 fellow members. You are all equal 25% owners.

Suppose the LLC makes a $20,000 profit in year 1.

How is that allocated?

Does each member get $5,000?

Do you get your $10,000 back first, and the remaining $10,000 is divided 4 ways? (eg. you get $12,500 and the other three each get $2,500).

Some other method?

In other words, while the memo line method would establish that the check to the company was a capital contribution (compared to, for example, payment for services or a loan to the company), it would not spell out the members’ rights to the capital contribution after the company earns profits and, one day, eventually dissolves.

How your capital contribution is treated is determined by your operating agreement.

If you don’t have a written operating agreement, and there are multiple members in your LLC….get one.

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Startup Capital For A Coffeehouse LLC

I’m attempting to start up a coffeehouse and want to maintain control of my venture, but don’t have the necessary capital saved up to begin operations. To make it simple, let’s say I have $5K saved, but need $50K to start up. If I raise the needed funds from various investors, is there a way to maintain single ownership? By default, if someone is willing to invest $10K into my venture, doesn’t that give them majority ownership? — Seth,Nevada

Response:
Not at all.

In fact, someone could lend you $10k and have zero ownership in the company–instead, they get a promissory note.

This is the essence of a loan.

Furthermore, ownership of the company is NOT necessarily proportional to capital invested. If these investors are passive investors, and you are actively running the business, it would make sense for you to have a greater ownership than just your proportion of capital.

I would first explore a setup where the investors are loaning you money, perhaps with a healthy interest rate and even a kicker based on profits.

There is no rule that says that you have to give up majority control in order to fund your business.

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How Do I Change Ownership Of An Illinois LLC?

I and my partner formed an LLC with two owners and now we just want to have the LLC in just one owner’s name. how can i do it?

– Raj, Illinois

Answer

You should first execute a written amendment to your written Operating Agreement to show the changes in ownership.

Next, depending on your state, you might be required to file Articles of Amendment with your state.

Illinois does not require an LLC to file Articles of Amendment when the LLC’s members change.

However, Illinois does require annual reports to be filed, and on those annual reports, it asks for the names of all current members. During next year’s annual report, you will report the change in the number and identity of the members.

A copy of the Illinois Annual Report form can be found here:

Illinois Annual Report PDF.

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Do I Need to Transfer a Business Vehicle’s Title to My LLC?

If we are changing from a standard business to an LLC do we need to change title to the LLC on a vehicle that has been previously depreciated out?

Answer

If you want the ownership of the vehicle changed from “a standard business” (I assume you mean a sole proprietorship or partnership), to your LLC, then you will need to change the title.

Right now, the vehicle title is probably in your personal name. Therefore, any liability associated with the vehicle (even if another person is driving it), is associated with you personally as the owner.

Because you want the vehicle’s liability to be contained within the new LLC, you will need to have it owned by the LLC. Which means, transferring the title.

Remember that the LLC is its own legal entity–like a person. If you want another person to own your vehicle, you need them to re-title it.

Same with your LLC.

In terms of the tax effects of re-titling, that’s to be discussed with a tax adviser. If it’s been fully depreciated, then there’s probably little impact (particularly if the vehicle has little or no market value).

As far as deducting on going vehicle expenses as business expenses, there are two method:

Method 1 is to keep track of all repairs, maintenance, gas, vehicle property taxes (if your state charges those), and depreciation on the vehicle and use that to calculate expenses.

Method 2 is to keep track of business mileage and multiply that by the IRS’ business mileage rate. For 2012, that number is 55.5 cents per mile.

You will also want the LLC to hold insurance for the vehicle.

Just as an aside, be sure you have adequate insurance for your vehicle, particularly under-insured motorist and un-insured motorist. With the economy bad, you wouldn’t believe how many uninsured people are driving. If one of them puts you in the hospital for a month, and you get a $100,000 medical bill and tens of thousands in lost income, you can recover from your own uninsured/underinsured policy.

I would recommend a minimum of 100/300 under and uninsured motorists coverage, with 250/500 being preferred. The difference in premiums is small compared to the risk.

The most likely way for a young or middle aged person to be disabled temporarily or permanently is through an auto accident. High UIM/UM insurance limits are critical to ensuring that an uninsured driver doesn’t ruin your financial health along with your physical health.

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How To Deduct A Christmas Meal/Party For A Small LLC?

We have a two member LLC. The second member is my wife. She’s a legit member (professional, with some part-time work contribution), but since it is a spouse, the taxes are simple (LLC income and deductions treated as, well, a pass through entity I guess is the term).

I understand having the LLC buy us non-business meals might be viewed as commingling personal and business funds (not to mention not tax deductible if not business related). However, all that being understood: Any reason this LLC could not buy a Christmas meal/party for its members? Would your answer change if clients were invited? Thanks!

– C.J. Colorado

Answer

A business can deduct all ordinary and necessary business expenses.

This includes business meals and client entertainment, provided you meet the IRS regulations.

The IRS’ rules limiting the deductibility of certain business meals have become stricter due to past abuses by businesses, but generally, if the expense is business related, then it is deductible.

Here is a publication explaining the rules:

IRS Publication 463 Travel, Entertainment, Gift and Car Expenses

The most important factors in deducting more business expenses are:

1. Knowing what your business expenses are.

This means keeping accurate books on Quickbooks or similar small business accounting software.

2. Knowing what is deductible.

This requires having either a good paper-based tax guide or using tax preparation software such as TurboTax, whose interview-style format makes sure that you don’t miss any category of deductions.

3. Ensuring you qualify for the deductions

This means keeping copies of you receipts, written mileage and business purpose notes for deductions automobile expenses, and use of business credit cards and business checking accounts for business expenses.

4. 50% Limitation on Business Meals / Entertainment

The IRS places a special limit on the amount of business meals and entertainment expenses you can deduct. Instead of being able to deduct the full amount spent, you can only deduct 50% of the cost of a business meal & entertainment expense.

See IRS Publication 463 (linked to above) for more detail on exceptions and exceptions to the exceptions.

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Do I Need A Business License For A Home Business?

I plan on running a communications business from my home solely online.

Would that require a business license from my municipality?

Additionally, should I apply for my EIN before or after I form my LLC?

Answer

If your business is solely online, and there are no customers visiting your home, then I don’t see a need for a business license.

You apply for your EIN after your form your LLC. The EIN is a unique number assigned to each LLC (and corporation, limited partnership, etc.)

If you haven’t formed your limited liability company yet, then there is nothing to assign the EIN to!

There are also free EIN application instructions on this website, but again, this is to be done after you form your LLC.

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Can We Contribute Personal Funds To Our LLC?

I have an LLC, we are starting to run low on funds as our LLC was established for our ghost hunting club. This was so we could legally accept funds for tours and the like. But our funds are just about depleted and we still have expenses related to web site and the like. As well as the tax preparation in January that will empty the rest of our funds.

Is there a law against us contributing our own personal funds into the LLC, we are a partnership LLC? So this is what we must do to keep things going. So, do we just fill out more membership shares related to the contribution? Or can we just deposit the funds right into the LLC?? Please help as we don’t want to go about this in the wrong way as we just formed our LLC. Thank you.

– Rob, New Jersey

Answer

There is no problem with contributing additional funds to your LLC. Simply deposit the money into the LLC’s bank account.

You can contribute the money either as a loan to the LLC, repayable to the member who contributed the funds, or as a capital contribution.

You do not have to issue additional membership interests for the capital contribution, nor transfer membership interests/units between members.

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How Do I Convert A Sole Proprietorship To An LLC?

How do I convert a sole proprietorship with an ein # to a LLC with the same ein #?

Answer

When a sole proprietorship changes to a corporate or partnership form (such as an LLC), you need to apply for a new EIN.

Assuming that the new LLC will continue to have only you as a member, it will be a single member LLC. As an SMLLC, if you have employees, you will need to obtain an EIN. If your company has no employees, then the IRS will let you use your social security number or you can use an EIN.

Question about converting a partnership to an LLC:

My husband and I opened a business as a partnership with one EIN. We want to protect our personal assets, so we’re considering becoming an LLC. We will not add any partners or change our business structure.

To do so,
1) Do we need an new EIN?
2) What forms do we need to complete for the LLC designation?

Answer

If the partnership is relatively new, form a new LLC and operate the business under that new entity.

If you have significant assets in the partnership, there might be tax consequences to making the change and you should see an accountant and/or attorney.

You’ll need a new EIN for your LLC. Remember, you are creating a new legal entity by forming an LLC (as opposed to a partnership, which is just a combination of partners, but no entity that is wholly separate from the partners is formed).

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Could You Please Clarify Business Versus Personal Assets/Debts With Regard To Liability, Protection And Bankruptcy?

A couple questions:

1. An LLC protects your personal assets from business debts/lawsuits, etc; does it also protect your business assets from personal debts/lawsuits, etc? (Could a creditor from a personal account seek compensation from your business?)

2. The same questions w/regard to bankruptcy: If you personally file bankruptcy, can you leave your LLC in tact & untouched (including assets)? And, how does that work in the event of business debts or loans that have been personally guaranteed? (Are these discharged as personal debt within the personal bankruptcy – still leaving the business in tact – or do they expose your entire business to risk by connecting the two?

Answer

These are fairly complicated questions, but here’s the overview:

1. Your ownership in the LLC is a personal asset of yours. Think of it like a stock. If you own GM stock, GM’s creditors can’t come after your house simply due to your ownership.

On the other hand, a personal creditor of yours can seize your assets, including your GM stock.

However, your membership interest in an LLC is somewhat different from owning stock in that your LLC’s operating agreement can have provisions in it which prevent a creditor who seized your interest from exercising any control over the LLC.

In other words, the personal creditor would “own” the LLC interest in the sense that the creditor would receive any profit distributions (this right of the creditor is called a “charging order”), but could not control the operations of the LLC.

This has an interesting application. Remember how LLCs are pass-through entities? That means that the owner owes taxes on the LLC’s profits, regardless of whether the LLC pays out any money to the members.

Normally, of course, the members will pay themselves out all the profits, or at least enough to cover taxes.

However, if a creditor has taken over your LLC interest, the remaining members could do something very sneaky to the creditor.

They could cause the LLC to recognize profits (say, by selling an appreciated asset), but NOT distribute any money to the members.

Thus, the creditor would owe taxes on his share of the profits, but would receive no money to pay them with.

2. Bankruptcy would be similar to the above, but with the extra complications of bankruptcy law. You’d really need to talk to an attorney about this one.

There is some case law that says that a single member LLC owner who goes bankrupt might be in a worse position than if a member of a multi-member LLC declares bankruptcy with regards to control of the LLC, but again, you’d need to speak with an attorney.

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Is It Possible To Create An Umbrella LLC For 2 Sole Proprietorships?

My wife and I currently each own a sole proprietorship business in Ohio. The 2 businesses do not sell related products or services. I would like to create an umbrella LLC and then establish each of these existing businesses as a DBA under a single LLC name. My goal is to provide more protection for us as a LLC. Is this possible to do or recommended? Would we be limited to one EIN and thus one checking account if we do this? I believe we want to maintain separate checking accounts.

– Jay, Ohio

Answer

It is possible to establish a single LLC and then create 2 DBAs for your separate existing companies.

The problem is that, for liability purposes, both “separate” companies are actually considered one and the same.

Using a single LLC for both businesses will save you a few dollars in formation fees, however, you now expose each business to liabilities created by the other.

I would suggest that if you want the businesses separated, both financially and from a liability standpoint, you ought to create separate LLCs for each one.

To save some money on creating two LLCs, learn how to file for your own free EIN here.

Fortunately for you, being in Ohio, there are no annual reporting requirements and no annual fee per LLC. Therefore, the only additional costs for creating two LLCs is the initial Ohio formation fee.

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DBA or LLC or Both?

When filling out an Articles of Organization form, should I fill it out as Company XYZ, LLC doing business as Joe Smith Roofing or should I do the DBA separately?

Answer

A DBA and LLC formation are two separate things, and which you use (or if you use both), depends on the circumstances. Here are three scenarios and the right response for each:

1. You want to do business as a sole proprietor under the name “Joe Smith Roofing”.

In this situation, you’d simply form a DBA and not form an LLC. You have the disadvantages of personal liability, however, as a DBA is legally no different than doing business under your own personal name.

2. You want to form an LLC named Joe Smith Roofing, LLC.

In this case, you’d form an LLC, and fill out the Articles of Organization with the name as Happy Go Lucky, LLC.

3. You want to form an LLC named Joe Smith Enterprises, LLC, but do business as Joe Smith Roofing.

In this third situation, you’ll need to form an LLC called Joe Smith Enterprises, LLC. Then, in a separate form (with a separate fee to the state), you’ll need to file a DBA for Joe Smith Enterprises, LLC d/b/a Joe Smith Roofing. The second scenario is the most common way people name their LLCs, though there are situations like yours where you are seeking the third option.

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Question About Depositing Checks Into LLC Bank Account

I assume I will occasionally get a check payment from a client made payable to my personal name instead of the LLC name. So, I plan to set up the LLC’s bank account to accept deposits with either name. Is this a problem (with respect to protecting the “corporate veil”, i.e., the appearance of commingling business and personal funds)? Does it matter if this occurs rarely vs often? Thanks!

– JD, Colorado

Answer

This does happen occasionally, and no matter how many times you tell your clients otherwise, they will send checks in your name.

As an attorney, I have accidentally received settlement checks in my personal name instead of the name of the firm I work for (and my name isn’t part of the firm name).

I simply sign the back of these checks and hand them to the office manager and everything works out fine.

As far as your corporate veil goes, yes, this is technically commingling.

The most dangerous kind of commingling is taking checks written out to your LLC and depositing them in your own account–not the other way around as you’re describing.

If this happens infrequently, I would not be too concerned.

Remember too that commingling is only one factor in veil piercing, and is by itself usually insufficient–there needs to be some element of fraud or other unjust behavior on your part to justify piercing the veil. In other words, the commingling that gets a veil pierced is when it is associated with the underlying fraud. A typical example is an owner of a company draining company funds for personal expenses instead of paying the company’s creditors.

There is nothing unjust or fraudulent about depositing a check into your LLC account that was written to pay for services/products provided by your LLC simply because your client wrote the wrong name on the check.

In conclusion: encourage your clients to write a check to the proper name, but don’t let it keep you up at night if you get the occasional check written to you personally instead of for the business.

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What Is The Difference Between A Managing Member And Managing Manager?

What is the difference between a managing member and a manager in terms of
a) authority
b) taxation

What is the maximum number of managers/managing members can a LLC have?

Can the managing member/manager reside outside the US?

Thanks

Leena d.

Answer

A managing member is a member of an LLC who is able to make decisions for the LLC–sign contracts, etc.

A manager of an LLC is a non-member who has been chosen by the members to operate the LLC. Sort of like a CEO for a corporation–the shareholders hire the CEO to operate the business day to day.

A manager who is not a member is simply an employee, and is taxed like an employee receiving a paycheck. The LLC takes a deduction for the expense of the manager’s salary.

A managing member, on the other hand, is an owner as well, and is taxed as a member of the LLC however the LLC has chosen to be taxed (as a partnership, as a disregarded entity or as a corporation).

Yes, LLCs can have members who reside outside of the US (unlike an s-corporation, which cannot), and there is no legal limit on the number of members (again, s-corporations have limits on the number of members).

There are practical limits to the number of members, however, and if you get too many members (in the several hundreds), you can run into SEC regulations regarding investments.

But if you’re talking about a couple dozen members, or even 100, there is not a problem.

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How Do I Dissolve My LLC Back To Just A Sole Proprietorship?

I am a single member llc and no longer wish to be an llc. How do I dissolve my llc back to just a sole proprietorship?

Answer

They are called Articles of Dissolution, which are filed with your state’s Secretary of State or equivalent.

Legalzoom has a service that will dissolve your LLC for you inexpensively here.

Go to the bottom right of the page, under “Additional Business Services” and click on ‘Dissolutions’.

The state fees vary from state to state.

The value of formally dissolving your LLC, and publishing notice of its dissolution (if required by your state), is that you begin the statute of limitations clock for any claims against the LLC or you as a member of the LLC.

Be aware that once your LLC is dissolved, if you continue to operate your business under your own name, you could be held personally liable for debts of, and tort claims against, the business.

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I Want To Wind Up My Single Member LLC

As a Florida resident what steps must I take to wind up a 6 month dormant single (sole) member LLC?

– Jeanne, Florida

Response

The term for “winding up” your single member LLC is called “dissolution”.

If the LLC has been dormant and not transacted business, then you would simply file Articles of Dissolution.

You can E-File your Florida Articles of Dissolution here:
Dissolve Florida LLC .

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How Do We Pay Out Distributions To Members?

In your operating agreement do you spell out exactly how and when the members are paid out, or do you have to pay out your profits as they are incurred?

Example: Can I state in my operating agreement that I will pay out a certain dollar amount per month, starting on a particular date (i.e. beginning in year 3) until the member’s entire investment has been repaid plus and additional dollar amount (say double what they have paid in) and then can I make a particular date and a particular dollar amount to buy them out?

This way I know my exact cash flow to investors.
I understand that they will pay taxes on the profits of the company, but is that regardless of how much I actually distribute to them (I do know that they won’t pay taxes on return of contribution) or do I need to pay them consistent with the profits of the company in addition to their return of contribution?

Thanks for this forum, these are burning questions.

– Lori, Colorado

Answer

You can definitely spell out in exacting detail in your Operating Agreement how members will be paid.

Also, LLC’s that are taxed as partnerships are permitted to distribute cash ‘unevenly’ (an amount disproportionate to the member’s ownership interest).

Remember that a member of a pass-through entity does not pay taxes based on money distributed to them, but on their proportionate share of the LLC’s profits or losses. An LLC is permitted to distribute losses differently among the members–e.g. a member with a 1% interest can take 90% of the tax losses in a particular year.

This can be spelled out in your operating agreement.

As a member of the LLC, you do not report the amount distributed to you, but instead report the amount on your K-1. The amount on the K-1 can be the same or different from the amount distributed.

You can distribute money to investors even if you don’t have profits (or, conversely, you can distribute less than the full amount of profits). These payments can be characterized as interest on a loan, or as guaranteed payments.

Once you get multiple classes of members, with different allocations of profits and distributions, you really ought to get the advice of an attorney or accountant. These are not the type of operating agreements to draft on a napkin after reading something on the internet.

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Do DBA Names Need To Be Unique?

I want to use a business name that is already taken. Do DBA names need to be unique?

– X, New Jersey

For example:
1) I wanted to name my company Joe’s Pizza, LLC, but that was already taken.

2) I ended up incorporating with my full name:
Joe Arthur Fonzerelli Pizza, LLC
.

3) Can I still create a DBA name as Joe’s Pizza?

4) What if someone else has already registered a DBA name of Joe’s Pizza? Does the DBA name need to be unique in the state where it is registered? (New Jersey)

Thank you!

NOTES: All names above are fictitious. Any similarity to a real person or company is coincidental. My real circumstance happens to be with a software development company.

Answer

DBAs, as well as your legal corporate name, cannot be identical to another name already in use in the state.

While the state might permit to register Joe’s Pizza as a DBA (because the names aren’t identical letter for letter due to the “LLC” at the end), if the owner of Joe’s Pizza, LLC objects, he could probably successfully sue you for trademark infringement and/or unfair competition claim for choosing a confusingly similar corporate name.

You should avoid choosing a confusingly similar name to a business already in existence, particularly if the two businesses compete in the same market.

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Do I Need To File An Operating Agreement Within The State?

Do I need to file an operating agreement with the state? If you don’t have to file the operating agreement with the state, where should one keep it? In addition can you amend the articles of organization to add a founding member or is that what is covered in the operating agreement.

Answer

You didn’t tell me your state, and some of the answers depend on what state you’re in.

Whether you need to file your operating agreement with the state depends on which state you live in.

When you use an LLC formation company, they will let you know during the formation process what filings are necessary.

If your state does not require filing of operating agreements, you should keep it where ever you store important documents (safe deposit box, a file cabinet at home, in a pile of papers on the kitchen table….just kidding about the last one). Your LLC’s operating agreement spells out the rights of the members in the LLC in case of a dispute among the members, and important asset provision vs. creditors of the LLC and/or the members. It’s important to have an operating agreement, and preferably in writing (even if your state does not require it).

Also, some states require amending articles of organization to add new members, but with most you simply update your operating agreement.

Furthermore, many states require LLCs to file annual reports, and one of the pieces of information on an annual report is to identify all of the members. Therefore, you will update the state on the number and identity of the members, though that does NOT necessarily mean that the state is provided a copy of your LLC’s operating agreement.

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Do I Need To Set Up An LLC To Trade Stocks?

Starting out as a part time private stock investor. However, have invested $ already in training programs, and will continue to travel to classes, and incur more business expenses that could be used toward write offs. I’ve been told that it would be best to just set up an LLC. Does this make good financial sense?

Answer

If all you’re doing is trading stocks on the national exchanges (and not buying majority interests in companies and running them yourself or through a manager), then you don’t need an LLC.

As an ordinary shareholder of, say, Microsoft stock, you have no liability for any debts of Microsoft. The added limited liability protection of purchasing common stock through an LLC is an unnecessary expense.

Secondly, your investment expenditures are tax deductible against your investment income (dividends, interest, capital gains), regardless of whether they are owned by you directly or through an LLC.

In conclusion, there is little reason to form an LLC to invest in stocks.

The only thing that might change my mind is if you plan on having a partner investing with you, in which case you might want to create an entity and spell out precisely each member’s contributions, responsibilities, and profit/loss sharing in your LLC’s operating agreement.

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Is A Nevada Or Delaware LLC The Best?

The short answer is yes…if your business is located in Nevada (or Delaware).

Otherwise, your best bet is to form your business entity in the state where your business operates and you live.

There are many myths about forming Nevada LLCs and corporations. One such myth is that you can avoid paying income tax by incorporating in Nevada. Repeat after me: “there is no (legal) way to avoid income tax except by earning no income”.

Another myth is that you can hide your assets from your creditors (including ex-spouses and bankruptcy trustees) by forming a Nevada corporation and handing bearer shares in the corporation to an accomplice.

Needless to say, these techniques don’t work. Bad things happen when you try to cheat the IRS or a bankruptcy judge.

In many cases, it’s unnecessary. Most people, if they used the tax rules to their fullest, would save more money than they do already. It is not necessary to cheat to lower your tax bill.

Costs of Nevada and Delaware LLCs

Ok, so say you don’t want to cheat the taxman or creditors…are Nevada or Delaware LLCs nonetheless cheaper to form and operate compared to other states?

Each state charges a different fee for forming a limited liability company.

In addition, some states also require that each LLC file an annual report and pay an annual fee for the privilege of doing so.

The states with the highest formation fees do not necessarily charge the highest annual fees.

Therefore, to best compare the cost of forming an LLC, this site uses a “total cost of ownership” approach which adds up the entire cost of having an LLC in a specific state for 5 years.

Delaware and Nevada are both aware of their popularity as destinations for the formation of corporate entities–and they charge fees accordingly.

Delaware charges a $250 annual reporting fee while Nevada charges $325.

In contrast, there are 28 states that charge less than $100 annual reporting fees, and 8 states that charge no annual LLC reporting fee.

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How Do I Legally Remove My Name From An LLC

What document do I use to legally remove my name from an LLC and its liabilities?

Answer

When you say “remove my name” from a limited liability company, I assume that you mean that you are a member of the LLC and want to resign. This called “withdrawal” from the LLC.

The addition or resignation of member of a limited liability company is governed by your LLC’s operating agreement.

All limited liability formations performed at LegalZoom include a customized operating agreement, which includes provisions and forms for the removal/withdraw of members as well as dissolving the LLC.

Some LLC operating agreements permit withdrawals only if the other members agree. Other operating agreements let a member withdraw for any reason. It entirely depends on what the members agreed to.

In the absence of an operating agreement–or if the operating agreement is silent on the issue of withdrawal–then your state’s LLC statute will govern. Most state LLC statutes describe under what circumstances a member may withdraw from an LLC, how much notice they must give the other members, and so forth.

Therefore, with a limited liability company already in existence, you will have to review your operating agreement.

Some states require that a form be filed with the state when membership in an LLC changes. Any of the advertisers on this site can help you with that process for a reasonable fee.

This is distinguished from a “dissolution” which terminates the LLC’s existence.

Dissolving a limited liability company requires filing a form–called Articles of Dissolution-with your state.

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Does A LLC Have To Carry Insurance?

Is a LLC required to carry liability insurance?

Answer

Usually not, though it’s a good idea to carry liability insurance to protect your business assets and to have the insurance company pay for your legal defense.

In some states, if you are a professional LLC, such as a law firm or doctor’s office, your licensing board might require insurance.

If the LLC has enough employees to fall under the state’s Workers Compensation law, then it might have to purchase that type of insurance.

If the LLC owns a business vehicle, then state law regarding minimum auto liability insurance is, of course, necessary.

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Does A LLC Protect A Business In A Divorce?

If I have been working a business by myself, can I form an LLC and have my business protected in case of a divorce?

Answer

Are you already married?

If you’re already married, there isn’t a whole lot you can do to protect your assets in case of a future divorce.

Divorce laws differ by state, but generally, you are able to keep what is termed “separate property” in a divorce. Separate property is money obtained prior to the marriage, or by gift or inheritance.

The trick with separate property is if you commingle it with marital property, it can become marital property.

So, if you get a big inheritance after your marriage, and deposit it in a joint checking account with your wife, and both you and your wife are putting money in and taking money out of that account, your inheritance is likely to become marital property.

The same goes with your interest in your LLC–it’s no different than if you buy stock during your marriage. It’s likely to become marital property.

Now, some people form companies and LLCs to fraudulently conceal assets in a divorce, but I’m not going to go down that road.

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Unemployment Benefits for LLC Members

If you are an LLC and pay into unemployment benefits, can you lay yourself off and collect employment benefits?

– Brandy, Oregon

Answer

If an LLC pays an employee, and thereby pays unemployment insurance, then a laid-off employee can collect unemployment benefits (provided all the other requirements are met).

Your question seems to be, can a member of an LLC pay him/her self a W-2 wage and then lay herself off for unemployment benefits? No. The unemployment statutes prohibit the owner of the business from laying him/her self off and collecting unemployment.

If the LLC elected to be taxed as a corporation, and you paid yourself a wage for a time, and then stopped paying yourself, your eligibility for unemployment depends on your state. Some states, for example, prevent corporate officers who own more than X% of the company stock from claiming unemployment (in Washington, for example, it’s 10%).

There is a pilot program operating in a few states that might permit the self-employed to collect a form of unemployment compensation:

Self-Employment Assistance.

Here’s how the program is described:

“Self-Employment Assistance offers dislocated workers the opportunity for early re-employment. The program is designed to encourage and enable unemployed workers to create their own jobs by starting their own small businesses. Under these programs, States can pay a self-employed allowance, instead of regular unemployment insurance benefits, to help unemployed workers while they are establishing businesses and becoming self-employed. Participants receive weekly allowances while they are getting their businesses off the ground.

This is a voluntary program for States and, to date, Delaware, Maine, Maryland, New Jersey, New York, Oregon and Pennsylvania have Self-Employment Assistance programs. The State Workforce Agency web sites for these states can be accessed at: http://www.servicelocator.org/OWSLinks.asp.”

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Established LLC/S Corp investing in a new LLC

I am a 50% partner in an LLC/S Corp. My partner and I want to establish a second business (unrelated to first) first as an investment (hopefully for tax benefits) and then as a potential source of income. I understand we can form a new LLC and name the S Corp a partner and another person a (percentage) partner. The S Corp could then ‘invest’ in the new LLC and run it separately, but be a part of its gains and losses for tax purposes.

At the point of establishing the new LLC, does the established LLC/S Corp simply transfer money into the new LLC as the initial investment — for the new LLC to purchase inventory or the like to get started? Is the investment into the new LLC then tax deductible for the established LLC?

Thank you in advance.

Answer

The established LLC/S Corp would invest the money in the new LLC and either take stock (thus the investment would be a capital contribution) or take back a promissory note (in which case it would be a loan).

The mere investment of money into the LLC is not a taxable event for either party.

When the new LLC spends money and incurs business expenses in excess of its revenue (i.e. recognizes a loss), then that loss “passes through” to the owners.

In this case, at least one of the owners/members is the LLC/S Corp. So the LLC/S Corp would take the deduction.

But again, the deduction would not be taken until the new LLC actually posts a loss by having currently recognizable expenses that exceed revenue.

Think about when you individually purchase a stock. When you buy $10,000 worth of stock, you don’t get a deduction. Same here–when the established LLC invests $10,000 in the new LLC, it doesn’t take a deduction. Not until the new LLC posts a loss (or it goes bankrupt and cannot pay back the capital contribution and/or loan), does the investor get a deduction.

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Can You Just Pay A Partner For Expenses And Not An Actual Compensation Fee?

Can you just pay a partner for expenses and not an actual compensation fee?
We have just started and have agreed that if we can withhold from paying ourselves for the rest of the year it would be a good way to get extra working capital for the business.

– Amie, Ohio

Answer

There is no requirement under the LLC statutes that you pay out profits to the members. Members can (and often do in practice), work without compensation in the start-up years of a new business. Often times, the members will even lend money to the LLC to get it started if they don’t have access to outside investors.

Remember, however, that as the LLC earns profits, those profits will be reported on the members’ tax returns, and generate tax liability, so the LLC might want to distribute at least enough of the profits to the members so that they can pay their taxes.

In most cases, brand new businesses lose money during the first year or two. In that situation, those losses can be taken as tax deductions by each member on that member’s personal tax return.

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Filing An LLC Tax Return When Your Company Made Little Or No Money

We began a start up company in 2008 as an llc, we are just getting started and our production is not even running yet. We have made no income from our business yet, but we have put money into all the equipment and supplies etc. Do we need to file taxes?

Answer

Did your LLC have expenses? If so–and the LLC had no revenues–the your LLC by definition had a loss.

In that case, the LLC’s loss becomes your personal tax deduction.

By neglecting to file, you are going to overpay on your personal taxes.

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New Business And Made No Money. Do I File Taxes?

Hello i got an EIn number in 2007 for an llc that I had opened, but things happened and I could not get my store up yet. i have not made any money from this business. Do I still have to file taxes? Do I have to fill out a form or something to claim that I did not make any money? Thanks for your help?

– Dawn, North Caroling

Answer

File a Form 1065 (partnership return, assuming your LLC is taxed as a partnership).

Fill in all zeroes for revenues and expenses.

If you had some business expenses (such as the cost of incorporation, maybe you opened a bank account and incurred some fees, etc.), then record those.

You’ll show a loss, which will then act as a deduction on your 1040, reducing your personal taxes.

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If You Make No Money As An LLC Do You Still Have To File And Pay Out Taxes At Year End?

If your business operates as an llc and makes no money or looses money do you still have to file taxes and will you end up owing or you have to file regardless and you can file your business expenses for a return?  What if there are not enough funds in LLC account?

Answer

If your LLC loses money, then the loss becomes a deduction on your personal 1040 tax return.

However, in order to take this deduction, you must file a return for your LLC–either a 1065 (for multi-member), or Schedule C for disregarded single member LLCs.

Failing to file a tax return for an LLC that loses money means you are leaving a tax deduction on the table, and thereby overpaying on your taxes (or getting a smaller refund).

If there isn’t enough money, you may want to consider loaning money to the LLC from your personal account and memorialize the loan with a promissory note.

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If LLC Income Is Under $2k Do I Need To Pay Taxes On It?

We are a club, garden state ghost hunters LLC. We went LLC so as we can have small ghost tours to generate funds to help our club obtain equipment.

Neither the founders or members make any personal financial gain from these fund raisers.

But the GSGH LLC will get the profits after expenses which is usually only about 200 to 300 dollars, never exceeding over 2 K a year. We thought we should have an LLC so as we are legal to operate these fund raisers, but we have absolutely no idea how to file taxes and the like. Any and all help would be great.

Thank you.

– Robert, New Jersey

Answer

Assuming your LLC is taxed as a partnership, you would first file a Form 1065, partnership return.

This would report the total profit/loss for your LLC. However, the LLC does not, itself, pay these taxes.

Instead, the LLC then issues a K-1 (part of Form 1065) to each member of the LLC, showing their portion of the LLC’s profits. A copy of the K-1 is also sent to the IRS (similar to how a copy of your W-2 and 1099 are sent to the IRS).

Each member will then use the K-1 to report his percentage of the LLC’s profit on his own 1040 tax return.

Note: Be sure that you are running ALL your LLC ghost hunting expenses through the company. That means automobile mileage for driving to the tour areas, advertising, food during the tour, any recording equipment used, etc. etc.

You might find that at the end of the day you don’t have a profit, and might even show a small loss (which is deductible against your regular income).

For under $50 you can pickup an older version Quickbooks on Ebay, and track your LLC expenses to ensure that you’re not paying a penny more in taxes than you should.

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For Privacy, If I Use A Resident Agent, When Do I Use Their Address Vs. My Own?

I have a question regarding Resident Agents and privacy.

I run a home based business and would like more privacy. If I were to hire a resident agent, do I use the resident agent address for other things, such as opening business bank accounts and applying for business credit cards or do I use my personal address? Or when I deal with customers or vendors that need to pay me and need my EIN number, am I supposed to use my resident agent address or my personal address?

Answer

The Resident Agent is for official business such as notices from the state, IRS, and lawsuits. It is also the address that will be publicly accessible to anyone on the internet through your state’s official website (usually the Secretary of State and the Corporations Division).

A registered agent is not a mail forwarding service (though some providers bundle mail forwarding with registered agent services together for your convenience).

When it comes to dealing with customers, to best protect your privacy, I would use a post office box or a private mailbox and/or mail forwarding service.

So, you would have your business address as a PO Box (all your bank statements, bills, payments from customers would be directed there–if you get a lot of mail that requires a street address, look into private mailbox services that provide street addresses), and use a registered agent service for your registered agent.

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Forming An LLC In The U.S. While Technically Living Abroad

We are a military family (US residents) currently residing the Germany. I would like to form an LLC to start a business providing deposition summary services to Stateside lawfirms. Although while technically a resident of Illinois I have no real property there. Must I incorporate in Illinois or can I form the LLC in another state, ie Arizona. The business will be 95-100% electronic. The business address would be our military address.

– Christina, Germany

Answer

Because you are living outside the United States, you ought to choose to incorporate in the state with the lowest formation fees, lowest on-going compliance requirements (e.g. no annual reports), and most pro-business laws.

That probably means NOT Illinois, New York, or California 🙂

You are a good candidate for a Delaware or Nevada LLC, or even from one of the low cost, no-annual reporting states.

States with No Annual Reporting Requirement for LLCs

  • Alabama
  • Maryland
  • Missouri
  • New Mexico
  • Ohio
  • Pennsylvania
  • South Carolina
  • Virginia

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Forming An Out Of State LLC With A Cheaper Filing Fee

I wanted to form a llc in a state with a cheaper filing fee–I’m in Pennsylvania. Is this legal, and will I have a problem operating in Pennsylvania if the llc was formed out of state? This is for a property management company.

– Michelle, Pennsylvania

Answer

Yes, it is legal to form an LLC out of state.

In Pennsylvania (as in most states), an out of state LLC (called a foreign corporation) is permitted to do the following:

§ 4122. Excluded activities.

1. Maintaining or defending any action or administrative or arbitration proceeding or effecting the settlement thereof or the settlement of claims or disputes.
2. Holding meetings of its directors or shareholders or carrying on other activities concerning its internal affairs.
3. Maintaining bank accounts.
4. Maintaining offices or agencies for the transfer, exchange and registration of its securities or appointing and maintaining trustees or depositaries with relation to its securities.
5. Effecting sales through independent contractors.
6. Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, and maintaining offices therefor, where the orders require acceptance without this Commonwealth before becoming binding contracts.
7. Creating as borrower or lender, acquiring or incurring, obligations or mortgages or other security interests in real or personal property.
8. Securing or collecting debts or enforcing any rights in property securing them.
9. Transacting any business in interstate or foreign commerce.
10. Conducting an isolated transaction completed within a period of 30 days and not int he course of a number of repeated transactions of like nature.
11. Inspecting, appraising and acquiring real estate and mortgages and other liens thereon and personal property and security interests therein, and holding, leasing, conveying and transferring them, as fiduciary or otherwise.

Foreign corporations are also permitted to:
——————————————-
§ 4143. General powers and duties of nonqualified foreign corporations.

(a) Acquisition of real and personal property.-Every nonqualified foreign business corporation may acquire, hold, mortgage, lease and transfer real and personal property in this Commonwealth in the same manner and subject to the same limitations as a qualified foreign business corporation.
——————————————

What is the penalty for doing business in PA as a foreign corporation?

————————–
§ 4141. Penalty for doing business without certificate of authority.

(a) Right to bring actions or proceedings suspended.-A nonqualified foreign business corporation doing business in this Commonwealth within the meaning of Subchapter B (relating to qualification) shall not be permitted to maintain any action or proceeding in any court of this Commonwealth until the corporation has obtained a certificate of authority. Nor, except as provided in subsection (b), shall any action or proceeding be maintained in any court of this Commonwealth by any successor or assignee of the corporation on any right, claim or demand arising out of the doing of business by the corporation in this Commonwealth until a certificate of authority has been obtained by the corporation or by a corporation that has acquired all or substantially all of its assets.
————————-

In other words, you can’t sue in a PA court if you’re a foreign corporation acting without a certificate of authority.

I would check with PA attorney to see if the exception under 4143 includes property management activities. He or she could probably quickly find some PA caselaw on that issue.

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Tax Question When Forming An LLC In Nevada W/ Husband & Wife As Members

If forming an LLC in Nevada w/ husband & wife as members if we elect sub s – can IRS decide to treat as a single member LLC because we are married?

– Jerry, Georgia

Answer

You can choose either method of taxation–partnership or disregarded entity.

Use IRS Form 8832 (opens to a PDF in a new window–turn off your pop-up blockers) to elect your tax classification for your limited liability company.

If you don’t elect a specific taxation method, the IRS can/will choose one for you. That’s why it’s important to decide which you want at the beginning and make your election in writing, via the proper form.

Note: Because Nevada is a community property state, the IRS permits a husband and wife LLC to be treated as a QJV- Qualified Joint Venture. This is not so in non-community property states–husband and wife LLCs are taxed as partnerships (or corporations), but not as disregarded entities.

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Can I Form An LLC From Abroad?

Hi! we want to found an LLC from Europe.  Can we fill all the papers for founding ? How many papers we need to fill?  I know we need an agent. How big cost have we to estimate for the agent?

What is the total cost of founding LLC?  In operating our LLC,we keep all the invoices we give and receiving. Will we pay the tax by the balance of incoming and outgoing invoices?

Can we make our annual report ourselves?  thanks in advance your infos.

– Joseph, Europe

Answer

In terms of forming an LLC, the fact that you are a non-resident of the United States is not a problem.

This is not so with S-corporations, for example, where each shareholder must be a US resident or citizen.

As a foreign citizen forming an LLC in the US, I would suggest that you get help with the formation.

You are correct in knowing that you need a registered agent located in the state you’re forming your LLC in.

As far as taxation, you’ll need to talk to a tax advisor in your home country, as many countries permit you to offset taxes paid in one country against taxes owed in your home country. However, this depends on which countries you are talking about.

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Unsigned Operating Agreements

I have been with a company 14 months where another person filed the company registration papers with the state. A partnership agreement was draw up sent to my attorney we countered and ultimately the agreement was never agreed to or signed. Does that mean there is no partnership? What are my legal rights/risks in IL to walk away from the company?

Answer

Is this a “partnership” or an LLC? I’m going to assume it’s an LLC, and that you are using “partnership” in the colloquial and not legal sense. If they were drawn up by an attorney for an LLC, they would be labeled an “Operating Agreement”.

You need to verify whether these “registration papers” were Articles of Organization (for an LLC) vs. the formation of a limited partnership under Illinois law.

First off, you really need to see a licensed Illinois attorney who is familiar with LLC and closely held business disputes (e.g. not the guy who fixed your DUI).

But, you can get yourself familiar with the overall picture, so you can follow your lawyer’s reasoning.

Without a signed Operating Agreement, you’re stuck with the “default” rules in Illinois under the Illinois Limited Liability Company Act.

805 ILCS 180/et. seq.

You can view the entire act here (grab a cup of coffee–you’ll have a tough time staying awake reading this):

Illinois Limited Liability Company Act

You want to look at section 805 ILCS 180/35-50&70 (Dissolution/Dissociation).

Unsigned llc operating agreement legal?

by chris
(new hampshire)

I wish to leave an llc I have been a part of for a few months now. An operating agreement was drawn up but never signed by either party.

Is there any action I need to take at this point? I have not signed any documents, agreements, etc associating me with this llc, everything has been verbal and in good faith.

Can I simply walk away?

Thanks,
Chris

Answer

Is your name listed on the Articles of Organization?

Is your name on any bank accounts of the LLC, or have you signed any leases, opened a credit card, or any other activity that associates your name with the company?

If the answer to any of the above is yes, then the safest route is to formally remove yourself as a member.

Because you don’t have a signed operating agreement with the other members of your LLC, you are at the mercy of New Hampshire’s default LLC statutes.

You’re going to need to see a New Hampshire attorney about this one to draft documents complying with NH law.

Another question about unsigned operating agreements:

What are the possible downfalls of not having ones name on an LLC , when you have a partnership?

(New York)

I own a business in NY and an LLC was formed in CT by my partner (where he resides) for this business. His is the only name listed on the LLC, but he is as I said a partner in the NY business. Will the fact that my name is not on the LLC have any repercussions on the business (or me personally for that matter) should the business ever become for sale, or, if there are any possible royalties incoming from an entity that may want to “buy-in” or invest in the property?

Answer

Some questions for you:

1. After the CT limited liability company was formed, did you transfer the assets of the NY business into the CT LLC? In other words, does the CT LLC own anything?

2. What form was the NY business in before your created the CT LLC? (e.g. did you have a partnership, a sole proprietorship, a corporation, etc.).

3. If the NY business was an incorporated entity, are there documents showing a purchase of the the NY business by the CT LLC?

Your interest in the LLC is not determined by who is listed in the Articles of Organization. It is determined by how many membership interests you own.

You should have documentation in your Operating Agreement stating what percentage of the LLC you own. If the LLC started out with your partner owning 100%, and then you purchased 50% of the membership interests, there should be a purchase and sale agreement for the membership interests.

Unsigned operating agreement

by David Smith

(Atlantic beach, Florida)

What is the legal standing of an unsigned Florida LLC operating agreement. I believe that no company is formed and the document can be change at will until signing.

Answer

I think you are confusing Articles of Organization with an operating agreement (don’t feel stupid, these are common mistakes).

No LLC is formed until the Articles of Organization are filed with, and accepted by, the state of Florida.

If Articles have been filed and accepted, a company is formed.

The operating agreement governs how the LLC will be run. An unsigned operating agreement is not going to be binding (though an oral operating agreement is binding in some states), and therefore Florida’s default LLC rules will govern the LLC.

Whether the operating agreement is signed or unsigned, it can be amended by written consent of all the parties to it.

Is this operating contract valid?

In March 2008, A, B and C, who are all US citizens based in San Francisco, enter into an Operating Agreement for their newly formed California Limited Liability Company. Each of the parties has signed the agreement by logging into a website with their personal username and password and clicking on an ‘Agree’ button after having the chance to scroll through and read the agreement.

Answer

I would ask an attorney about this one. There might be an electronic signature act that covers these types of agreements.

Is there no paper document as well?

Courts are very old fashioned, and they like paper (if this were to ever go to court).

How To Give Shares To A Spouse

My husband has formed an LLC in which he is ‘sole owner’. He wants to give me ’49’ shares of the 100 shares. We live in Ohio. Can we do this ourselves or do we need an attorney? Is there papers we need to provide to someone or is just simply type up a doc saying he is granting me 49 shares?

– Wendy, Ohio

Answer

When it comes to money or the law, you should put everything in writing, even if the transactions are “between friends” or even spouses.

NO ORAL AGREEMENTS!

Excuse me for shouting, but I see people who are otherwise very sophisticated (like doctors), entering into transactions for hundreds of thousands of dollars with nothing more than a verbal agreement.

Then they complain when there is a dispute, and it costs a fortune in legal fees to untangle the “he said, she said” without the help of a written document.

Please don’t be one of those 🙂

These transactions don’t just affect you, they also affect creditors and governmental authorities–so even if you “trust” your friends, relatives, spouse, it needs to be in writing.

A simple written document (prepared by yourself) transferring shares would likely suffice.

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H1B Forming An LLC

Hi,

I am in Maryland on H1B. I work full-time for a software company.

I am planning on starting my own LLC which conducts R&D and software development while of course, working full-time to maintain my H1 status.

Are there any things I should know off? Will I be able to operate the business? How about making a profit?

Also am I eligible to claim business expenses on my personal tax return (sole owner). Will the profits also be combined with my personal tax return?

Thanks!

Rick, Maryland

Answer

There are no restrictions on who can own interests in an LLC, and this includes non-citizens on H1B visas.

By contrast, some other business entities (such as the s corporation) have limitations on foreign citizens/residents owning interests.

No such limitation exists with the LLC.

As far as operating your business at a profit…that’s up to your marketing, business savvy, etc.

There is no requirement that you work at your business full time, nor any prohibitions against working full time while also operating your LLC.

In terms of tax reporting, if you form a single member LLC, the IRS will treat it as a disregarded entity.

All your LLC’s revenues and expenses will be reported on Schedule C of your personal tax return (1040). If your LLC shows a profit, then your personal income tax return will show higher taxable income, whereas as loss will reduce your taxable income.

The key to minimizing your taxes with an LLC is to maximize your legitimate business deductions. A business owner has far more opportunities to take deductions than an employee.

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Can A Single Member LLC Get A Health Insurance Deduction?

Can a single member LLC which has only part time employees deduct health insurance premiums for it sole member/owner?

Answer

Yes, thanks to a 2003 tax change.

You might find some older advice, written before the 2003 tax change, that will tell you only corporations can deduct health insurance premiums.

The deduction for health insurance premiums for the self-employed can be found on line 29 of your Form 1040.

Note a couple of caveats:

1. Your SMLLC must have been profitable: You can only deduct health insurance premiums paid up to the amount of the LLC’s profits.

2. You must not have been eligible for coverage under your own employer’s (assuming you have a job outside of your LLC’s business) or your spouse’s employer’s health insurance plan.

3. The insurance should be setup under your LLC, covering you + dependents.

4. If the SMLLC has no employees, the sole owner/member can still purchase an individual health insurance policy and deduct the premiums (to the extent of profits) as described above.

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Using My Home Address As An LLC address

Using your home address for your LLC address, won’t that be a bit confusing in terms of your personal bills, utilities, even to your mail carrier, etc? Won’t that seem as if you’re already commingling your business with your personal life?

Secondly, could you further explain what is looked at as commingling your business funds with your personal funds. You stated you can pay yourself everyday from your LLC, how is that not viewed as commingling? Where is the line drawn?

Thanks for all your help!

– Jackie, Missouri

Answer

We have clients in the real estate business who have dozens of separate LLCs (usually one per property or group of properties), and they all use the same office address. It’s a very common practice.

As far as using your home address, that shouldn’t cause a commingling problem. Sure your company bills come to your home, as well as your personal utility bills–but, you’re not paying your personal utility bills with company checks, right?

In the new rental home I’m in, I sometimes get junk mail addressed to a home based business that the previous tenant ran. It never caused or causes a problem. Mail carriers are used to multiple people living at, and businesses receiving mail at, the same address.

Think about commingling this way, using a job as an example.

You receive a paycheck from your employer. It’s a check written on the employer’s bank account to you. You deposit the check in your bank account. From your bank account you pay all your personal bills.

Now, commingling would be if you took a couple of blank company checks from your employer and used them to pay your personal bills.

To avoid commingling, then, you simply need to only write the following kinds of checks from your LLC bank account:

1. Checks for the LLC’s business expenses;

2. Checks for profit distributions to the LLC’s members.

If you do that, then you are not commingling funds.

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How An LLC Manages Overseas Software Developers

Hi,

This is Mehul again. I am an owner of a Single Member LLC, which is currently operation as consulting firm.

I have my friend working from oversease for my LLC.

I asked you: ” How to compensate him/her for his/her work?”

You responded: ” Have the vendor generate invoice and pay vendor from business checking”

I have some questions on your answer and some other as below:

1) How can I Pay? Do I must need to send Physical Check to him/her? Or I can Pay via some third party services (for example xoom.com/western uinon/etc.) as his/her bank account will be in another country?

2) can I directly pay them to their personal checking account from business checking account or i must need to pay to some corporation or LLC in oversease and then they need to get paid from there?

3) currently, there are one person is working for my LLC from oversease, does it make any difference that ” How many people are working from oversease? ” or LLC just requires an Invoice to pay them ( Doesnt matter how many of they are working there)?

Your response is highly appreciate.

Thanks again in advance for all your help.

Answer

These are in-depth questions for a general interest website. You’ll need professional advice, but here is some general directions to look in.Let’s start with what NOT to do.

Option 2 is out. Don’t pay them from a personal account.

Instead, have the vendor generate an invoice billing the LLC for the work performed.

When the LLC receives the invoice, it will pay the vendor from the LLC’s business checking account to the vendor’s account.

The invoice from the vendor along with the LLC’s bank records showing the payment will be the documents you need to keep for tax and accounting purposes.

Assuming the LLC is a US business, its accounting should be kept in US dollars. While the vendor is paid in Indian currency, that amount will equal a certain amount of US dollars. The US dollar amount is the amount the LLC will report to the IRS as an expense.

1. It does not matter where or how the vendor is paid so long as the method (check, wire, credit card, etc.) is acceptable to both parties.

2. You should pay whatever entity (personal or individual) invoices your LLC for the work.

3. You simply need an invoice from the overseas independent contractors showing the work performed and the amount charged and the date of services and billings.

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How Do I Pay An Employee If I Have An LLC?

hi im thinking of going llc i have a small concrete finishing business and i want to protect my assets im thinking of like a partnership type thing with my wife but how do i pay employees or other people that help me without going through the hassles of payroll and other tax issues.

Answer

If you have an employee, then you must go “through the hassles of payroll”. This is regardless of whether you are a sole proprietor, LLC, corporation, partnership or other.

There are two solutions to this.

The first is to use a payroll service to handle these hassles. Quickbooks has a payroll service that is affordably priced. For a reasonable price, Quickbooks payroll service will handle all the taxes, withholdings, and so one that must be done.

The second solution is to treat your workers as independent contractors. In that situation, you would withhold nothing from their paychecks, and instead issue a 1099 at the end of the year.

However, you cannot treat just anyone as an independent contractor. The IRS has certain rules for when you can treat a worker as a statutory employee vs. independent contractor:

http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Be careful about misclassification of your workers:

Consequences of Treating an Employee as an Independent Contractor

    If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.

If you really want to go deep into the topic of employee classification, here is the document the IRS gives its agents to train them on whether to classify your worker as an employee or IC:

http://www.irs.gov/pub/irs-utl/emporind.pdf

You can file an SS-8 form with the IRS and they will determine an employee’s classification for you:

http://www.irs.gov/pub/irs-pdf/fss8.pdf

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How Do I Remove My Name From A DBA Partnership I Have With Another Person?

I obtained a DBA with my brother in law to form a drywall business. I found out that he was doing some things that weren’t right by me(keeping funds for his own use vs paying the material bill with the funds).
I want to be rid of him. He is forming a bad name for me with less than perfect work, not to mention the embezzlement! How do I remove my name from the DBA and get my own. I would like to become LLC.

Answer

Do you two have a written partnership agreement, or are you simply doing business together?

Assuming you have a written partnership agreement, you can follow the procedures therein.

Otherwise, as “de-facto” partners, you’re going to have to determine what your state’s requirement is for revoking a DBA.

Remember that a DBA is just a way of officially “renaming” an already existing entity. For sole proprietors, the DBA is “renaming” themselves. John Smith becomes XZY Dry Cleaning.

Moreover, a DBA can also be used as official alternative name for an entity like a partnership or corporation. For example, Jack & Jill partnership can be DBA’d to a business name like Superior Water Fetching.

You should examine the DBA filing and figure out if the filing was under your name, your brother’s name, or both names as a partnership.

You’ll also want to remove your name from any bank accounts for the business, and remove your partner from access to any of your bank accounts.

You’ll also need to inform, in writing, all of the vendors you use that you are no longer part of the partnership, and that you are not liable for any orders your former partner places in “your name”.

The legal concept is called “apparent authority”. If you and your partner have held yourself out to the public as being a partnership, then if your partner orders supplies, you are going to be liable.

The only way to protect yourself is to send a letter (keep a copy for yourself) to each supplier and tell them that you have dissolved the partnership and that your former partner cannot place any orders in your name, and that he has no authority to act on your behalf and that you have withdrawn from the partnership.

That letter would destroy any expectation in a supplier’s mind that you are agreeing to be liable on these orders.

Partnerships are dangerous because if a partner goes “rogue” and starts buying things in the partnership’s name, and then doesn’t pay the suppliers, the other partner is personally liable.

If you have a big line of credit, this could be tens of thousands of dollars.

Unlike someone slipping and falling at your store, there is no insurance you can buy against a partner’s illegal activities, and this happens more often than you think.

We see a ton of lawsuits between and among partners–both when times are good (each wants a bigger share of the pie) and when times are bad (each points the finger at the other as the cause of the problems).

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How Does An LLC Protect Me From Lawsuits?

How does an LLC protect me from lawsuits?

Answer

There are several articles on this site on the concept of limited liability.

What an LLC does is it creates a wall between the liabilities of your company, and your own personal assets.

If someone gets a judgment against XYZ, LLC, they can only go after the bank account, property, etc. of XYZ, LLC. They cannot go after the bank accounts or property of XYZ, LLC’s owners.

So while forming an LLC won’t stop someone from suing your company, what it will do if properly structured is ensure that they can only sue your company, and not you personally.

There are exceptions to this concept, called piercing the corporate veil, which is there to prevent fraudulent use of corporations. There are a couple pages on this site about veil piercing, and how to prevent it.

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Does An LLC Protect More Than Just Assets?

Hi, I have a small business (an LLC) that resells gift cards that I buy online. However, the prices of the gift cards that I buy online are somewhere between 40%-60% off the retail value of the card and I suspect these cards were acquired illegitimately or through some type of fraudulent activity, but I have done some research and couldn’t find any evidence proving that this is so.

Also, the gift cards are available at these same low prices at most online auction sites like eBay, Sell.com and others.

My question is, if these gift cards do turn out to have some fraudulent or maybe even criminal activity behind them, what type of legal action can be brought against my company for selling the gift cards to my customers and what steps can I take to further protect myself if that is the case?

– Nick, New Jersey

Answer

The way an LLC (or any corporate entity) works is that your LLC is a legally separate entity from yourself.

Your LLC and you are as different–legally–as you and your neighbor.

If your neighbor is sued for fraud, does that affect you? Of course not.

Same with you and your company. Now, if it can be shown that you personally knew of the fraud and participated in it, then you could be held personally liable. This is more common in closely held companies (for example, a single member LLC with no employees) than with a huge multi-national corporation.

As far as your company being held liable, that is going to depend on the facts and circumstances of the particular case, and you will need to consult an attorney on those issues.

Generally, you are not liable for your corporate debts, unless:

1. You contractually agreed to be liable (e.g. you personally guarantee a bank loan to your company;

2. Your corporate veil is pierced;

3. You are sued personally for your personal (as opposed to corporate) actions (e.g. you own a bar, and decide to punch out a patron–you could be sued personally for your assault).

If I had to guess at your situation, your corporation could be liable for fraudulent gift cards.

If you are charged criminally with anything, see a lawyer immediately…don’t try to “talk your way” out of it.

You’ll end up talking yourself into jail.

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How Does One Add A Member To An Existing Single-Member LLC?

How does one add a member to an existing single-member LLC? Can both members then be managing members? If necessary, how is this designated?

Answer

You add a member by updating your Operating Agreement to show the new member. Some states require that you update your Articles of Organization as well.

In addition to updating the Operating Agreement, there should also be some document showing what the member paid for his/her membership units in the LLC and how many units the new member acquired.

Any member can have the authority of a managing member. This would be designated in the updated Operating Agreement.

Question About Starting A Single Member LLC With Intent to Add Members Later

Question: Hi, I am looking to form an LLC and I’ll be the only member right now. Being a small startup, I’d like to know “best practices” of how this company should run now and how it should be run as soon as I have other members. Thank You!! — by New Yorker Girl, (NY)

Answer

The main things are:

1. Create your LLC as soon as possible–before you start entering contracts or selling to the public. If you haven’t created one before, I would suggest using a full-service online incorporation company such as Legalzoom or the Company Corporation.

2. Open bank accounts, credit cards, paypal accounts, etc. in your LLC’s name as soon as possible.

3. Invest in a good accounting software (such as Quickbooks).

4. Make sure you have a written operating agreement–particularly once you add another member to your LLC. (See answer above about mechanics of adding member).

5. Use a payroll service to pay your employees so your business does not get behind on paying withholding taxes.

6. If your business has employees, make sure to obtain worker’s compensation insurance.

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How To End An LLC ?

We recently started an LLC for our club, so as we could raise funds legally.

turns out it is costing us more money and time to have the LLC and now want to close down the LLC and just go back to running our little club. It has only exisited for 60 days if that, it is a two member LLC too.

But it seems as a small club, there is alot of paper work and tax prep. fees and we do not even have that kind of money. So how do we legally end the LLC and do we need to file federal tax papers for 2008 if it only existed for only 60 days and we have not made $1.00?

Answer

If you lost money, then absolutely you want to report your losses to the government because you get to take a deduction and at least recover some of those losses in tax savings.

To end the LLC, you’ll need to dissolve it.  There are several steps to dissolving an LLC:

  1. Have all the members of the LLC agree to the dissolution.
  2. If you cannot get unanimous agreement to dissolve the LLC, then you must resort to the operating agreement’s provisions regarding how big a majority of members you need to agree to the dissolution.
  3. The members agree to dissolution in writing.
  4. Pay all creditors of the LLC what they are owed.
  5. File formal articles of dissolution with the state.

You can probably find the right forms searching the New Jersey secretary of state pages and fill them out yourself.

New Jersey charges $100 in state fees to file an LLC dissolution (remember to report this as an expense so you can deduct it, along with all your other business expenses).

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How To Pay Yourself As The Owner Of An LLC

I’m a single member LLC with a question about owner’s draws.

What is the difference between owner’s draws and guaranteed payments? I take a draw each month based on the net profit in the LLC for the month so the amount varies month-to-month. How is this treated in the LLC and are the owner’s draws considered income to me? If so, do I have to pay income taxes on the owner’s draws? If they don’t show as part of my income and are not taxable, can I show them as income to a mortgage co. for the purpose of refinancing?

Thank you in advance for your assistance.

– Susan, Connecticut

Answer

Some definitions first:

A ‘draw’ is a withdrawal of the LLC’s earnings. A member usually won’t not take a draw unless there are profits.

A ‘guaranteed payment’ is money that a member takes out of the business whether there is a profit or not.

For income tax purposes you are charged with recognition of your LLC’s profits regardless of your draws. Tax recognition and flow of money are two separate things in an LLC.

Example:

If the LLC made a $20,000 profit, then you will report it through your Schedule C. You DO NOT report that same $20,000 a second time due to the fact that you withdrew it during the year as the owner’s draw.

In terms of showing your income to a bank, you can show them copies of your tax return which will have your Schedule C (or if you’re a multi-member LLC, copies of the 1065 and K-1).

 

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How to pay owner of the LLC in single member LLC?

Hi,

I am the owner of Single Member LLC. The LLC is basically a consulting firm.

I have placed my self to the client side for project work through my own LLC.

I have confusion regarding my salary process.

1) How can I pay my self?

2) Do I need to run payroll for myself with the help of payroll company? or just write a check from my business checking account to my personal checking account and then use the amount for my self from there?

3) Which is better and safe way to use money for myself?

4) which way to get paid (Payroll or Direct Check from business to personal) will be give me more tax benefits?

5) if I would like to write checks from business checking to personal checking for my self, then how the tax withholding will work out? how do I need to pay taxes?

Your responses are highly appreciated.

Thanks in advance for your help.

Answer

Assuming you are the sole member of the LLC, and the LLC is taxed as a partnership or disregarded entity (as opposed to a corporation), you do not pay yourself using a W-2 payroll system.

Instead, you can take a draw of the LLC’s profits.

The LLC will write a check from the LLC’s bank account, payable to you personally, which you deposit in your personal bank account.

As far as taxes, there will be no FICA or withholding taxes on a draw.

Instead, you, personally, will be required to calculate quarterly estimated federal and state taxes and pay them on your own.

FICA and Medicare taxes (aka “payroll” taxes) will be paid when you file your annual 1040 tax return. They are what is known as “self employment taxes”.

As a self-employed person, you should consider investing in quality personal accounting and tax software such as Quicken and TurboTax, which will help with the quarterly estimated taxes and annual self-employment taxes.

Comment
I recently began paying myself from my LLC. I went online and transferred funds minus taxes (my accountant gave me that amount) to my personal account. Then I showed a minus near the check register that I had done that. My accountant says I cant do that and that I must write a check! Is that true and why? thanks!Art

Answer

As long as there’s a trail–electronic or check–I don’t see why paying yourself electronically is any worse than paying via check.

Did your accountant explain why?

Comments for How to pay owner of the LLC in single member LLC?

Thank You so much….

by: Anonymous

Thank you so much for your response. I appreciate it.
I have another question after your answer:


1) if I write check to my personal checking account from LLC’s Business Checking Account, is there any limit on amount of money or frequency of withdraw money in certain time period? for example, if I earn $10,000 every month, can I write check to my personal checking as per my need ($1000 sometimes or $50,000 sometimes) or I must need to maintain certain limits on amount on every checks? or number of checks per month?

Do I must need to maintain certain consistency on flow of money from my business checking to personal checking…? Or it’s on my own….?

Instead of saving the money in my personal checking or saving if I kept the amount in business checking or saving only and write checks to my personal checking as per my need, then what difference it makes?

At the same time the payroll (Salary) of any consultant working from my company will be count as expenses of company, how it will consider in my case as I’m the owner plus consultant and also not running payroll for my own and just writing checks?

I will also post this question on the site. Thanks in advance for your help.

Response

The process of taking draws rather than running payroll is supposed to be simpler…but look at all the questions! 🙂

Here’s a simple breakdown.

Your company earns revenue by selling products or services.

It then has certain expenses–rent, payroll (for all employees EXCEPT YOU–you are a member, not an employee), utilities, office supplies, advertising and so on.

Revenue – Expenses = Profit.

You, as member/owner can withdraw the profit in any amount, in any frequency, so long as you clearly indicate that these are draws.

Draws are not “expense” and you do not deduct draws from your LLC’s revenue. Draws are simply distributions of profits from the LLC to its owners–the members.

The LLC will calculate its profit or loss for tax purposes via form 1065 if it is a multimember LLC taxed as a partnership; or a Schedule C if its a single member LLC taxed as a disregarded entity.

For a multimember LLC, each member will be issued a K-1 reflecting that member’s proportionate share of profit or loss to be recorded as taxable income on their personal tax returns (in the case of a loss, it becomes a deduction on their personal return).

For a single member LLC, the LLC’s profit/loss will be calculated on Schedule C of the sole member’s 1040 tax return, and the profit/loss either adding to or subtracting from the individual’s taxable income.

If you’re wondering where payroll taxes (also known as FICA and Medicare tax) come in–you didn’t think you could avoid payroll taxes that easily, did you–they are calculated on Schedule SE. They are no longer referred to as “payroll taxes” in this context, but instead as “Self Employment” tax.


Paying yourself in an LLC

by Mike
(baltimore, MD)

When paying myself in my LLC, can i simply make online transfers to my personal checking account?

If so, how often will you recommend i do this throughout the course of the year.

Also, what if I want to put money into the checking account of the LLC for whatever reason…Anything I need to know in terms of how the IRS see’s this? My concern is the IRS and making sure i don’t get into any trouble on both questions.

Your site has been a blessing….

Thank you.

Answer

A blessing. Thank you very much for the compliment.

I get a TON of questions about how money should flow between the owner of an LLC and the LLC itself.

Let’s start with the overall picture, from 30,000 feet up. A limited liability company and its owner are two separate entities. Just like you and your neighbor are two separate entities. Just like you and you employer are two separate entities.

Veil piercing, and the IRS “problems”, you alluded to, occur when you, as owner of an LLC, ignore this foundational truth and treat your LLC’s bank account like your own.

Now, it’s true that all the profit of the LLC belongs to its members (and if you’re the sole member of a single member limited liability company, then all the profits belong to you). And yet, there are still formalities that must be followed to respect the separate existence of you and the company.

Putting Money In Your LLC
Whenever you put money in the limited liability company, you must explain what that money “is”.

Is it a loan?
Is it a capital contribution?

If it’s a loan, you will need a simple promissory note, executed by the limited liability company, promising to repay the loan. Yes, I know that YOU are the only member of the llc, so why sign a note to yourself? Because your LLC is not the same as you, even though you control it.

This is a strange concept, I understand, but just think of your LLC the way you think of your employer.

Would you write a check to your employer, to be repaid at a later date by them, without some written document? Of course not.

Same with your limited liability company.

Taking Out Your Profits

As a member of a limited liability company, you are entitled to withdraw your profits at any time, in any amount, in any number of transactions.

And you should, since you’ll be paying taxes on your LLC’s profits whether you take a distribution of profits or not.

Furthermore, understand that you must pay quarterly estimated taxes. This is not unique to being a member of an LLC–every taxpayer must make quarterly estimated taxes.

As an employee, your employer withholds quarterly estimated taxes for you from each paycheck.

As a business owner–whether LLC, sole proprietor, s or c corporation, or partnership–you must make quarterly estimated payments yourself.

See IRS FORM 1040-ES to calculate your estimated tax payments.

You might want to take out enough of your profits each month so that it adds up to enough to pay your quarterly estimated taxes, and then withdraw the remainder at the end of the year. This will require careful budgeting, however.

The other method is to withdraw your profits in equal monthly installments.

If your business is seasonal, you might want to make other arrangements, taking less in the good months and more in the slow ones.
Question From: Lotus Flower

For a single-member LLC, do you also need a promissory note to yourself when making a capital contribution from your personal account to the LLC? Or, what is the proper documentation procedure for this?

Response
If it is a capital contribution, then you do NOT use a promissory note. Rather, that capital contribution is counted as equity in the company.

If a member loans personal money to the LLC expecting to be repaid, then that should be memorialized with a written promissory note.


Return to Ask A Question About LLC Taxes.

What are the Rules & Regulation for writing Checks to Personal Checking from Business Checking for a Single Member LLC?

Hi,

This is Mehul again. I am an owner of a Single Member LLC, which is currently operation as consulting firm.

I have placed my self to the client side for Project work through my own LLC as an employee of LLC.

I asked you ” How to Pay my self for my work on client site?”
You responded ” I need to write a check of LLC’s Profit to my personal checking account from LLC’s business checking account and count estimated Federal/State Tax and pay them on my own.”

I have some questions on your answers as shown below:

1) How the Profit will be count for LLC? I am not sure how much amount I should consider as Profit for LLC from now apart from my salary as this is just a Starting period of LLC’s Income? I am not having count of all the expenses of LLC yet.

2) If I write a check to my personal checking account from LLC’s business checking account, is there any rules & regulation, I need to keep in mind or need to take care of?

3) when i write checks to my personal checking accounts, Is there any limits on amount of money or frequency of withdraw money for certain time period?

3.1) for example: If I earn $10,000 every month from client Project, and I might collected $100,000 in business checking account, Can I write a check to my personal checking account as per my need ( sometimes $1000 in one month, and some times $50,000 in one month)?

3.2) or I must need to maintain certain limits on amount on every check?

3.3) or number of checks per month?

3.4) Do I must need to maintain certain consistency on flow of money from my business checking to personal checking every month? or its on my own as per my need?

4) Instead of saving money in my personal checking/saving, if I keep all the money in business checking/saving only and withdraw by writing checks to my personal checking as per my need, then what difference it makes in both the scenario?

5) at the same time the Payroll ( Salary) of any consultant who is working on client site as an employee of my LLC, will be count as an expenses of LLC, then how it will consider in my case as I am the owner plus consultant for my LLC and also not running Payroll for me and just writing checks to my personal checking account?

Your response is highly appreciated.

Thanks again in advance for all your help.


Return to Ask A Question About LLC Taxes.

Paying LLC owners a bonus with minimal tax impact?

Is it possible to avoid additional tax burden by paying the owners of a LLC a incentive pay for staying or making a company profitable?

Would this reduce tax burden?

Or is it better to use the additional profit and instead of paying a bonus or incentive pay buying a tax deduction (car) for the owners?

Answer

As far as minimizing tax in the pass-through entity, you’re going to want to maximize your business expense deductions.

Payments to the active owners of an LLC are not a business deduction–it’s a distribution of profits.

Therefore, find a way to make a deductible business expenditure that is also of benefit to the owners. I’m sure you can think of something.

For entities taxed like a corporation, salaries paid to employees (including a shareholder), are deductible, but of course, taxable to the employee (along with the corporation’s portion of FICA/Medicare taxes).

You mentioned “incentive pay”. In corporations, the IRS has limited the deductibility of salaries above $1 million. The only way to pay an employee (usually a CEO or other C-leve executive) more than $1 million per year and still take a business deduction is to make it “incentive based”.

If this is your issue, then you have enough money to afford an attorney and accountant, which I would highly recommend.


Return to Ask A Question About LLC Taxes.

how best to “pay self”, employees, in single member LLC

by Bean
(Provo, UT)

Hi, thanks so much for your help and information.

My question concerns the best way to structure budgeting for paying employees and myself in a single member LLC in which I am the sole member.

My understanding is that, as a single member LLC, the pass-through feature allows me to pay taxes on the profit as part of my personal tax return so I don’t need to file separately for the company.

Does it make sense to pay employees (as well as all other company expenses), then pay taxes once on what’s left as income?

At that point the net income is essentially my income, and I could essentially take out what I wanted from it, right?

Or does it make more sense to pay myself as one of the employees?

Or none of the above?

Thanks so much for any advice you can provide!

Answer

Pay your employees using a payroll system…meaning, hire ADP, or some other service such as Quickbooks Payroll, to handle withholdings for your employees.

NEVER TRY TO DO PAYROLL ON YOUR OWN!

Unlike other business debts, as owner of your company, you are personally liable for unpaid payroll taxes and withholdings.

The IRS does not need to pierce the corporate veil in order to hold you liable–you simply are liable under federal law.

Same goes for state taxes.

As an employer you are an unpaid tax collector for the IRS, and if you don’t do your job, you not only fired but fined.

I also think these payroll tax debts are not dischargeable in bankruptcy (and bankruptcy has become very unattractive for debtors since the credit card companies got their bill passed into law a couple years ago).

Therefore, don’t fool around with payroll taxes–use a service like ADP or Quickbooks Payroll.

As the sole member of the LLC, you do not want to put yourself on the payroll.

Instead, you take distributions of the LLC’s profits. Your LLC’s profits are calculated as revenues – expenses (rent, utilities, advertising, employee payroll, etc.). You will report your LLC’s profits on Schedule C of your 1040 as a single member LLC (or a C or S corporation if you made that election — fixed per the comment below). Your LLC is taxed net of all expenses, which includes payroll to employees.

You can take profit distributions according to any schedule that fits your company’s cash flow. Be sure to distribute enough profits to yourself to pay your estimate quarterly taxes.

You can determine your estimated quarterly taxes using Form 1040-ES (think “EStimated”).

If you are also holding a “day job” (with a W2 and withholdings) in addition to running your LLC, then you need to factor in the withholdings from your day job. Otherwise, you’ll overpay and get a big refund when you file.

You will report your LLC’s profits on Schedule C of your 1040 as a single member LLC, or a Form 1065 + K-1 if you are taxed as a partnership instead of a disregarded entity.

A single member LLC can not be taxed as a partnership. It can be taxed as a C or S Corporation by election.


Return to Ask A Question About LLC Taxes.

Adjusted Gross Income and personal payment.

Does paying the business owner get deducted from the gross business earnings?

Answer

If your LLC is not taxed as a corporation, then payments to the owner are distributions of profits. Therefore, they are not deducted from the business earnings.

However, you also don’t report the owner’s draws as income to the owners. Instead, the gross business earnings are passed through to the owners as provided by the LLC’s operating agreement. Don’t double-count your draws and end up paying taxes twice.


Return to Ask A Question About LLC Taxes.

How to classify myself under an llc so that at the end of the year I don’t pay FICA on my dividends?

How do I to classify myself under an llc so that at the end of the year I dont pay FICA on my dividends? I had heard there is a way to accomplish this!

Answer

There are several ways of doing this (but still see a tax adviser anyway).

1. One method is to apply for taxation as an S corporation. When you receive a dividend from an S corporation, you do not pay FICA taxes on the dividends. The downside? The IRS requires that you be placed on the S corporation’s payroll, and receive a “reasonable” salary. And, of course, that reasonable salary is subject to FICA.

2. Self-employment tax is never owed on interest, dividends, capital gains, rental income, royalties, S-corporation profits, limited partnership income, IRA distributions, pension distributions, Social Security, or any excluded income.

3. There are advisors who say that a passive investor in an LLC (a passive member of the LLC) might be considered a “limited partner” (see above), and therefore exempt from SE tax. The IRS has not issued any regulations on this, so there is some risk if you are audited. Also, to be a “limited partner” in your LLC, you can’t have managerial control or actively participate in the LLC. You would need to have a manager operating your LLC.

Remember too that you get a deduction of one-half of your share of FICA taxes paid, so it’s really no different from being an employee when everything shakes out. In addition, your employer probably sets your salary level taking into consideration the employer’s share of FICA).

Comments for How to classify myself under an llc so that at the end of the year I dont pay FICA on my divdends?

by: GaryS


Do/should FICA taxes be paid quarterly? I’m a partner in a small LLC startup. It’s always been my understanding that I pay taxes on LLC profits at the year’s end based on my K-1. Does that apply to FICA as well?

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Married Couple LLC filing as a Disregarded Entity

The LLC was formed in 2004 with myself (75%) and my wife (25%). We have filed 2 returns in years 2004 – 2006: one joint personal return, one for the LLC taxed as a partnership. We have not filed for 2007 but need to by end of business on Monday. Can I elect a disregarded entity and file in one return. The LLC was formed in Delaware. We are residence and the business is located in Mass. If so, is there anything special I need to do given that we filed separate business and personal returns previously?

Answer

Use the following form to elect to have your LLC taxed as a disregarded entity (the only limited liability companies eligible for such treatment are single member LLCs and LLCs where the only two members are husband and wife):

http://www.irs.gov/pub/irs-pdf/f8832.pdf

Under IRS rules, you have to file the Form 8832 no later than 75 days after the date you want the new classification to take effect.

In your situation, it’s too late to elect disregarded entity status for 2007. However, you can file your Form 8832 to elect disregarded entity status going forward. Attach a copy of your Form 8832 to your partnership tax return when you file it.

QUESTION
is there any reason to continue to do the separate returns? Is there any other reason to do it besides the obvious administrative benefits?

Answer

If you are married, and file joint personal tax returns, I can’t think of any reason why your tax situation would change going from partnership taxation(where you and your spouse are the only members of the LLC), to disregarded entity status.

So yes, the advantage of disregarded entity status are the administrative benefits.

The only advantage to keeping it separate, and this is an “advanced” topic, is that as a disregarded entity, your income and expense statements are on your Schedule C, as opposed to a separate form 1065. Now, there are tax advisors who speculate that you are less likely to be audited if you file as a partnership using form 1065 rather than as a disregarded entity using Schedule C. The statistics do somewhat support that view.

That said, even the “increased” chance of audit using a Schedule C is about 2% (meaning, you have a 2% chance of being audited in any particular year).

With proper records and receipts, an audit should be nothing to fear. Furthermore, many audits are conducted through the mail, and do not involve an IRS agent physically rummaging through your desk drawers and files.

The administrative benefits of disregarded entity status accrue each year, while the chance of an audit is slim (you have a 98% chance each year of NOT being audited).

You make the call.


Return to Ask A Question About Single Member LLCs.

Members are Husband & Wife in a community property state

For tax purposes, can an LLC whose only members are husband and wife be treated as a single member llc in a community property state (CA)?

Answer

For income tax purposes, an LLC owned solely by husband and wife can be treated as a single member limited liability company. This includes election as a disregarded entity.

Whether the limited liability company is formed in a community property state is not relevant for this purpose–LLCs in all states can elect single member llc status if owned by a husband and wife who file their income taxes jointly.

Of course, being in a community property state will obviously have an impact on distribution of the LLC membership interests in the event of a dissolution of the marriage.

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Husband And Wife Forming Real Estate Company To Buy Homes

My Husband and I live in Texas and would like to form an LLC to be able to buy and rent homes and maybe commercial real estate in the future.
What are the steps required to form the LLC?
I know that we need to fill and send the certificate of formation with $325 (in Texas).
Can our home operate as a registred agent location?
How do we get an EIN?
Do we need an operating agreement?
Thank you.

– Sara, Texas

Answer

Here’s a 30,000 ft. overview of forming your LLC:

1. File Articles of Organization in Texas (Texas calls it a certificate of formation, but it’s the same thing).

2. Obtain your EIN from the IRS by filing form SS-4.

3. Draft an Operating Agreement for your LLC.

Yes, you can use your home as your registered agent address. A couple of things to consider before doing so:

  • Registered agent addresses are public record–you will get a ton of junk mail at your home
  • If your LLC is ever sued, the sheriff or process server is going to show up at your house. Using a registered agent service, the summons will go to your registered agent and then be forwarded to you in the mail
  • Anyone can find your home address by looking up your company’s registered agent information on the internet

Texas law permits you to operate an LLC without an operating agreement.

However, it’s generally a bad idea to do so. Without an operating agreement, you are subject to Texas’ default LLC statute (the Texas LLC Act). For example, under Section 101.107 of the Texas LLC Act, “A member of a limited liability company may not withdraw or be expelled from the company.”

So, if you want the ability, in Texas, to expel a member of an LLC or to have a member withdraw, you need to have a written operating agreement that provides that ability.

I would strongly recommend you obtain an Operating Agreement when you form your LLC.

Good luck with your new venture!

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I Am An Actor. Should I Incorporate Myself And Will That Help With Writeoffs?

I am an actor and keep diligent records of all my expenses for tax purposes. I am being audited this year because of this. Would incorporating myself be beneficial? My agent said I should and for Social security reasons as well. My accountant is still in the process of trying to have the audit end in my favor!

Answer

Incorporating or forming an LLC now won’t help you with your past (or ongoing) tax audit.

Once they have flagged your for audit, the audit is going to carry through.

However, there is some evidence from looking at audit rates that LLCs and corporations are audited less frequently than people who run sole proprietorships and use only a Schedule C.

Therefore, in addition to the other advantages of an LLC such as pass-through taxation, limited liability, and more deductions, it is possible that you would also reduce your chance of an audit.

That said, there is nothing you can do to prevent an audit–only lessen the possibility of one.

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I’m Forming A Real Estate LLC With Concerns About Taxation

My goal is to acquire 3 new properties a year and then rent each property to tenants. There are 7 other members of this LLC. What is the best way to arrange taxation on this LLC?

As a standard LLC? Or, arrange taxation as a Corporation? No dividends will be given to the members at least for 5 years.

– Anthony, Pennsylvania

Answer

You generally want taxation as a partnership, not a corporation, for the type of real estate venture described in your question.

A corporation is generally a bad idea for this type of real estate venture. The only time a c corporation would possibly be recommended is if you planned on forming a REIT (Real Estate Investment Trust) to be traded on public stock exchanges. Even then, not all REITs are c corporations–many are arranged as limited partnerships.

As a limited liability company taxed as a partnership, you and your partners would be able to tax the depreciation-caused losses as personal deductions on your personal tax returns. As a corporation, you would not, and would have to carry forward the losses against future gains.

Our firm does a lot of real estate work, and I don’t think we’ve formed a corporation for this purpose (owning real estate for lease) in years. Before LLCs, people used general or limited partnerships, in order to deduct depreciation losses on their personal returns during the early years of ownership.

In fact, this is a huge advantage of real estate investment–the ability to deduct non-cashflow losses (e.g. depreciation) — during the early years of the venture. Combined with borrowed money, the tax advantages to owning depreciable real estate in a pass through entity like and LLC or partnership are substantial.

A major consideration as well is whether to use a separate limited liability company for each piece of property. By doing so, you can put a legal “firewall” of liability protection between each property.

Most investors will form a separate entity for each property. Occasionally they will put several similar properties (such as multiple buildings that are part of a single apartment complex) in a single entity.

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If I Form Individual LLC’s For Real Estate, What Is The Big Company?

If I was to form an individual LLC for each house I buy, how does it work in the big picture. Is there one company above all the individual LLC’s?

Answer

Delaware (and some other states), have something called a “series LLC”, which is precisely for this purpose.

On the other hand, you can simply be a member of many LLCs.

We have major developer clients who are members of literally hundreds of LLCs. They (and their accountants) kill a lot of trees each year at tax time…..but it does work to keep liability for each property isolated.

It’s no different than owning stock in a whole portfolio of companies.

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Should An Independent Sales Rep Form An LLC OR Incorporate?

Independent sales rep should they incorporate ?
my wife is a MaryKay consultant and i an independent sales rep for a manufacturing company.Should we incorporate seeing that everything is paid on commission on a 1099 ?
thanks.

– Bobby, Florida

Answer

Take a look at the basic reasons to incorporate–protecting your assets and potential tax savings.

I’d say it’s a toss-up for your wife–the MaryKay consultant–and that you probably don’t need to incorporate.

As a reseller of MaryKay products, if there is, for example, a products liability issue (say the cosmetics injure people), then the resellers could get dragged in.

Having a corporate form would protect your personal assets in that situation.

Only you can decide if the expense is worth it.

Other Questions About Whether An LLC Is Appropriate For Your Business

Question: LLC for Consultant?

You mention in your Veil Piercing section that one of the major downfalls to LLC protection is if you have little to no ‘capital’ invested in the LLC. If your main business model is Consulting (with little investment capital required), is it common to still obtain an LLC?

–Chris, Ohio

Answer

What is a “little” amount of capital is, of course, relative to the business you’re in.

If you are starting a large manufacturing company and hiring hundreds of employees, that’s going to require more capital than a consultant who might only have incidental office expenses.

Consultants and other low-overhead service businesses often choose that LLC format for its lower administrative burden than a corporation.

A thousand dollars in capital (with the rest of the startup money for the business in the form of loans from you to the LLC), could be sufficient. This amount could come in the form of, in the case of a consultant, office equipment/computer donated to the LLC for use in the business.

Question: If your company is going to be home-based is an LLC recommended? — Jackie, Missouri

Answer

Yes, I would recommend the LLC for home-based businesses.

The limited liability company is one of the simplest business entities to operate in terms of administration while still maintaining limited liability protection for your personal assets.

For people working from home, forming a single member LLC with yourself as sole member can give you the advantages of incorporation without adding much of an administrative burden.

Corporations–both C and sub-S–require far more ongoing paperwork to maintain than an LLC.

You can create a very streamlined LLC for a home-based business by:

1. Form a single member LLC;
2. Act as your own registered agent;
3. Apply as a disregarded entity with the IRS.

Your ongoing paperwork burden will increase very little from being a sole proprietor.

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Is Transferring Money From A Business Account The Same As Writing A Check?

I recently formed an LLC from a sole proprietorship. Knowing that I’ll have to be more diligent about separating funds, is transferring money from a business account to a personal account the same as writing a check in order to get paid?

Also, I use an online billpay service with my bank to pay bills for both my business and personal debts. Since my business is a home based business, which account should I use to pay the bills associated with my home/place of business i.e. the mortgage, water, light, etc. since I use them all for both business and personal use?

– Stephen, Washington

Answer

When you withdraw your profits from your LLC, you simply write a check drawn off your business checking account payable to yourself.

For your business expenses, ideally you would pay for them directly from your business account (or a credit card in the name of your business, which is paid with money drawn from your business checking account).

So, stop paying business expenses from your personal account–whether you are using paper checks or online bill pay.

All business expenses should be paid from your business checking account. This makes tax time more simple, because all your expenses are right there on your business checking account statement–no need trying to figure out if a check was for a business or personal expense.

Where it gets tricky is with the home office deduction, where there is a partial use of the home for business and partial permanent.

What you’d want to do here is pay your mortgage through your personal account, but then take the home office deduction using IRS Form 8829.

These are the basics of how to handle business expenses for tax purposes.

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What Happens If I Don’t Want To Draw Any Kind Of Money Out Of The LLC?

With a single member LLC the questions here are concerning most of the times how to “pay yourself”/how to get money from the LLC bank account.  What happens if I don’t want to draw any kind of money out of the business ?

– Hugo, South Carolina

Answer

Nothing.

Remember, though, you still have to pay taxes on the LLC’s earnings, even if you don’t withdraw the money.

Because you pay your share of the LLC’s taxes out of your own pocket, the IRS doesn’t care if you leave money in the LLC.

All the above assumes that your LLC is taxed as a sole proprietor or partnership, and you did not elect to be taxed as a corporation.

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Can A Laptop Be Purchased As A Business Expense?

The business is in it’s first year and is a new partnership LLC (two members); should a laptop purchased be a deduction for start-up or amortized as a capital expense?

Answer

A laptop would qualify for expense treatment under the Section 179 deduction for small businesses. Any quality small business tax software will have a section where you can elect to take the 179 deduction for business equipment purchases such as a laptop.

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Living In A Different State Than The Single Member LLC Business

If I have a single member LLC in one state and then move to another state, while leaving the single member LLC business behind, would I just owe taxes in the state in which I am living?

Response

Income passes through the LLC and is paid by each member personally. Therefore, your personal state taxes would be determined by the state of your residence, not the state the LLC is formed in.

However, the state that you left might claim that you were actually earning a living in their state by virtue of your LLC being formed there–even if you were physically located in state #2. With the current economic crisis facing state budgets, I wouldn’t be surprised to see some states take this very aggressive (and unjustified, IMO) position.

This happens particularly often with California. If you owned a California LLC, I would highly advise that if you plan on moving to become a resident of another state, you look into selling the assets of the CA LLC to an LLC formed in your new state. There are might be tax implications of such a sale, so see a tax adviser, however, it is almost certain California will want to claim taxes on your California LLC (at the minimum, they will seek annual franchise taxes).

If your former state gives you trouble, you could always form a new LLC in your new state, and then transfer the assets from the old to the new LLC.

However, you would need to consult a tax adviser or accountant or attorney before doing any sales of assets or stock between the LLCs.

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LLC Adding Partners Or Selling Stock?

I am looking to start an LLC with one partner. We will have to hire a CEO soon, as I do marketing and he does programming.

Does an LLC allow you to offer shares to a new partner?

I do not want to start an LLC and then have to incorporate immediately.
Thanks

Answer

Yes, you can buy and sell membership interests in a limited liability company. These are generally equivalent to owning “shares” in a corporation. However, the Operating Agreement will specify particularly what powers a member has with respect to those shares and how taxes are allocated.

What that means is that you can write the rules for your LLC that makes membership units as easily transferable as in a corporation. On the other hand, you can tighten up the rules such that existing members have to approve new members, have the right of first refusal if a member wants to sell his/her units, prevent creditors that take membership units involuntarily from exercising decision making control, and so forth.

At a minimum, you will want written evidence that the shares were issued and money paid (or services rendered) in exchange for the membership units.

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LLC Based In NY, Can I Work In CT?

My LLC is based in New York. Will I be able to have clients in Connecticut?

Answer

A business can transact business anywhere in the country, regardless of whether it is incorporated in that state or not.

At most, you will have to apply for a certificate of authority to transact business in CT as a foreign corporation.

However, you might not even have to do that. “Doing business” or “transacting business” usually means something more than having a customer in another state.

Each state has its own law regarding whether a company is transacting business in that state for the purposes of requiring registration.

Here’s an example from Kansas (most states have similar laws):

Activities of a foreign corporation which do not constitute doing business within the meaning of K.S.A. 17-7301, and amendments thereto, include:

(1) Maintaining, defending or settling an action or proceeding;

(2) holding meetings or carrying on any other activity concerning its internal affairs;

(3) maintaining bank accounts;

(4) maintaining offices or agencies for the transfer, exchange and registration of the corporation’s own securities or maintaining trustees or depositories with respect to those securities;

(5) selling through independent contractors;

(6) soliciting or obtaining orders, whether by mail or electronic commerce or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts;

(7) creating or acquiring indebtedness, mortgages or security interests in real or personal property;

(8) securing or collecting debts or foreclosing mortgages or other security interests in property securing the debts, and holding, protecting and maintaining property so acquired;

(9) conducting an isolated transaction that is completed within 30 days and is not one in the course of similar transactions of like nature; and

(10) transacting business in interstate commerce.

(b) The ownership in this state of income producing real property or tangible personal property, other than property excluded under subsection (a), constitutes transacting business in this state.

(c) This section does not apply in determining the contacts or activities that may subject a foreign corporation to service of process, taxation or regulation under any other law of this state.

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LLC EIN vs Single member EIN (or TIN)

I just called the IRS regarding EINs for SMLLCs. I was under the assumption that all income for SMLLCs should be reported under the single members EIN (or TIN) and that if the actual LLC had an EIN (for banking purposes, etc.) that it should only be used for that purpose – not for using to report income.

The person I spoke with at the IRS told me that only one EIN was necessary and that at year end, the LLC would file a 1065 (which I thought was only a partnership return) for informational purposes and then a K1 would be issued to the single member that would be used to file the single members 1040 schedule C.

I am trying to figure out what EIN (or TIN) should be given to customers on a W9 but seem to be reading and hearing contradictory information.

Any ideas?

Thanks!

Answer

I have a single member LLC with its own EIN.

I receive 1099s under the LLC’s EIN from purchasers of my LLC’s services.

My 1040 is filed using my personal Social Security Number, and the revenue from my LLC is recorded on Schedule C (which has a place to reference your LLC’s EIN).

A single member LLC does not file a 1065, though I don’t think the IRS will mind if you do. I did the first year with my single member LLC, and they took my taxes 🙂 and then sent me a letter stating to use Schedule C in the future.

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Should Authors Have An LLC?

I recently published a book and plan to sell it to middle and high schools. Do I need an LLC?

Answer

I think the main consideration is whether you are solely an author (writing) or if you are engaged in the active publishing of your work (printing, distribution, marketing)

* Most authors are sole proprietors.

* Almost all publishing companies are incorporated in some form or another (corporation or LLC).

The primary purpose of the limited liability company is to protect your personal assets from liabilities generated by your business.

Do you foresee significant liabilities from your book?

I doubt you’re going to get sued by someone tripping and falling over your book….however, there are a few potential sources of liability I can think of.

Employees: Are you hiring any employees to work in your publishing enterprise?

I would strongly recommend that every small business person avoid employees like the plague unless absolutely necessary.

In today’s regulatory climate, it’s almost as expensive to dissolve the employer-employee relationship as it is to dissolve a marriage–plus, ex-employees sue more often than ex-spouses.

Contracts: While your publishing business doesn’t have much tort liability (slipping and fall over your book), you are involved in making contracts with printers, resellers, etc.

You are possibly exposed to contractual liability.

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What Are LLC Individual Members Rights?

Can a member be silenced by other members without reason?+

Petra, California

Answer

Member rights vary state to state, but as a general rule, members holding a minority interest in the LLC are protected from oppression by the majority.

Many states give members the right, for example, to inspect the company records (including financials).

As a minority member, you have rights granted to you by state law, and by your Operating Agreement.

You’ll need to speak with a California attorney and provide him with a copy of your Operating Agreement so he or she can determine your rights.

A helpful thing to do as well, when dealing with an attorney in litigation, is to write a chronological outline of the events in dispute.

This will act as a framework for your lawyer to interpret the mountain of documents that will soon arrive through the litigation process.

The advantage to you is that the less work your lawyer does figuring out what the heck went on (remember, yours is not her only case), the sooner she can address the legal issues and obtain a better result for you at a lower fee.

Don’t try to guess at the law in your narrative, just explain in order what happened, paying careful attention to the who, what, where, when, and how of the events.

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What Is The Difference Between An LLC Membership Agreement versus Operating Agreement

Is there a difference between an LLC Membership Agreement and an LLC Operating Agreement? Thank you. Based on some quick research, they seem to be the same thing.

Answer

They are the same thing.

While many states do not require a limited liability company to have an Operating Agreement, it is nonetheless a good idea to have one drafted.

If your LLC consists of multiple members, then it is imperative that your LLC have a written Operating Agreement.

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LLC Operating Without An Operating Agreement And Managing Member Controls Everything

I was told it is illegal in the State of Missouri to operate an LLC without an Operating Agreement. Please enlighten me. An Operating Agreement was never signed by the members. A “draft” was put together but that is where it stopped. To make a long story short, the members are blaming one member for all of the problems of the LLC, however this member is not the managing member of the LLC and has no control over anything.

Also, what can a member of a small LLC do when the managing member refuses to provide requested information such as financials and the member is attempting to sell their share but without information can not. The LLC operates at a loss and it is only at the end of the year when the LLC demands money from the members to pay such things as Taxes.

All members are equal partners – 1/3; 1/3; 1/3.

The LLC was set up to purchase and manage a commercial building.

– Dan, Missouri

Answer

If there is significant money at stake here (or potential liability), you need a lawyer.

As far as it being “illegal” to have an LLC without an operating agreement in Missouri, here is how the statute reads:

      § 347.081 RSMo. Operating agreement, contents — policy statement — enforceability, remedies
      1. The member or members of a limited liability company shall adopt an operating agreement containing such provisions as such member or members may deem appropriate, subject only to the provisions of sections 347.010 to 347.187 and other law.
      The operating agreement may contain any provision, not inconsistent with law, relating to the conduct of the business and affairs of the limited liability company, its rights and powers, and the rights, powers and duties of its members, managers, agents or employees, including…

So, Missouri law does say that an LLC “shall” adopt an operating agreement.

It doesn’t say it needs to be writing.

So, what kind of verbal agreement do the members have?

My guess is that each one has a different recollection of what they agreed to.

You see where this is going?

If there is significant money at stake, resolving this situation could involve large legal fees.

For everyone out there reading this, it is critical that you have a written operating agreement for your LLC.

This is a place where money spent on a lawyer–particularly if there is a lot of money in the company and multiple members–might be well spent.

In either case, the operating agreement is the first thing any lawyer will ask you when it comes time to resolve disputes among the members.

Without a written agreement, we are stuck with “he said, she said”, which are almost always more costly and risky to litigate then when you have written documents to rely on.

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LLC Or S Corp For An Independent Contractor Therapist

I am going to be an independent contractor occupational therapist. I am not sure if I should start an LLC or S corp. If I start an LLC can I write the taxes off under a S-Corp to save on self employment taxes in the state of Arizona? It will be only me in the business for the first few years.

Answer

You can form and LLC and choose to have it taxed as an S-corporation through a simple election form filed with the IRS, called 8832.

Yes, an S-corp can save you some (but not all) self-employment taxes under limited circumstances. However, you will invite extra scrutiny from the IRS to ensure that you paid yourself a “reasonable” wage (which is subject to SE taxes), and cannot simply take all your profits as non-taxed dividends.

If you start a corporation, and request s-corporation taxation, you will still have the issues of double taxation on the corporation’s dividends. Under Obamacare, there is a Medicare surtax and tax on net investment income for all high income taxpayers, that somewhat negated the advantage of dividends vs. wages.

Also, s-corporation status does reduce your company’s flexibility when it comes to ownership structure, if you plan on taking on additional owners now or in the future.

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How To Do Pass Through Taxes For A Husband And Wife LLC

I know single member LLC treated as pass through. But what about husband and wife filing jointly. How do we file to get the pass through?

– Kelly, Missouri

Answer

The answer is complicated, because the IRS has issued confusing guidance.

Here’s what the IRS says:

      A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.
      If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding.
    However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business’s income should be reported on Form 1065, U.S. Return of Partnership Income (PDF).

http://www.irs.gov/businesses/small/article/0,,id=97732,00.html

      In May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007 was signed into law and affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships. The provision is effective for taxable years beginning after December 31, 2006.
      The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.
    Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C.

The problem is, there is some dispute over what a “qualified joint venture” (QJV) is, and whether an LLC qualifies.

Some say that the distinction depends on whether you are in a community property state (in a community property state, a H-W LLC is a QJV).

Others think all LLCs owned by a H-W are QJVs and therefore qualify for schedule C treatment.

It is an unsettled area of law.

The default stance, it appears, is that an LLC with more than 1 member is partnership and files a 1065 return. Part of the 1065 return is your K-1. The information from the K-1 goes onto your joint 1040.

 

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My Wife and I are going into business together

by Scott
(Ky)

My father owns a small counseling service (llc) that my wife and are going to be taking over. How should we set this up? Should it be under one of our names and pay the other one a salary (1099) or should we go into it as a partnership. With that, how should we file our taxes under each scenario. Up to this point we have always filed jointly.

-Thanks!

Answer

If the business is already an LLC, then you and your wife would purchase the membership interests from your father.

If you both own the LLC, then, because you are husband and wife, you setup your LLC as a disregarded entity and simply file your taxes on your joint 1040 return, Schedule C.

Record all your LLC’s income and expenses on your schedule C. You will then have to file self-employment taxes as well.

I recommend that if you don’t already have an accountant (and I mean a “real” accountant, not the guys with a H&R Block booth at Wal-Mart), then you ought to get a good small business tax package.

TurbTax Online has a special edition just for small business owners who use Schedule C, called the “Home and Business” edition.

As an LLC owned by husband and wife, you will be filing like a single member LLC / sole proprietor using Schedule C.

If you’re not already using accounting software, get some. An old version Quickbooks can be picked on Ebay cheap. You need to keep track of all your income and expenses to take the maximum deduction you can and minimize taxes.

The other method is to have you own the LLC and then 1099 your wife. If you’re filing joint tax returns, I don’t see the advantage. You’re not going to avoid self employment tax, and you’re not going to avoid income tax. My initial read is that you, as a couple, will pay the same amount of taxes either way (though 1099ing your wife will involve more paperwork).

With the LLC owned by you and your wife, there is better protection against your personal creditors. If you were to own the LLC 100% yourself, and you were sued personally, the creditor could take control of the LLC to satisfy the debt.

On the other hand, if the LLC is owned 50-50 between you and your wife, the best your creditor could do is get a charging order against the LLC, and you wife could freeze out the creditor from recovering any money by refusing to make payouts of profits.

Good luck with your new business!

 

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My husband and I just formed llc this year and have a question about filing as a disregarded entity.

by mel
(Kentucky)

My husband and I just formed an LLC this year and we are the only 2 members. I’ve read some of the answers and see that we can file on our schedule C as a disregarded entity but do we have to file for that status or fill out any additional forms prior to filing our schedule C with our personal tax return?

Being the first year- we are lost and don’t want to do something illegal by accident!!!

Thanks so much and your site has been such a help.

Answer

The IRS has issued confusing guidance on whether a H-W LLC can be disregarded (Schedule C). There is some authority that the answer is:

      1. Yes.
      2. Yes if you’re in a community property state.
      3. No.

You will not run afoul of the law filing a Form 1065 and issuing K-1s to yourself.

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Whats best, A DBA or LLC?

Trying to figure out whats best: DBA or LLC. Basically, I want to protect our home first and foremost. Been married 6 months and the home is in my wifes name only. Im an independent contractor doing delivery and we want to seek our own clients and do our own thing. My wife and I want to form a company. We have the name, etc. and a couple potential clients in waiting.

The dilemma we face is how to form the LLC to alienate ourselves personally and financially from the the LLC and create a veil.

Should we create it in her name only and I sub-contract from her? Do we then open a separate business account at a bank and the company checks go in and she pays me a commission from that?

Would that still provide us any protection in the event of a lawsuit considering we’re married and live at the address listed as our business?

Or, should I just call it a day and open the business as a DBA and keep her completely out of matters to protect our home?

Thank you very much!!!

– Steve, Missouri

Answer

A DBA provides no liability protection to an individual. If John Smith is Doing Business As “XYZ Contracting”, then for the purposes of liability, XYZ and John Smith are the same.

I would suggest creating an LLC in both names. The reason is that separating out the work between the LLC as contractor, and you sub-contracting from the LLC as an individual subjects you to personal liability.

Under your scenario, in the event of a lawsuit against the LLC, the plaintiff would probably name you personally, as the subcontractor who actually did the work, in addition to suing the LLC.

Even worse, if you aren’t careful with the paperwork of the subcontracting arrangement, a court could look at the entire enterprise (you, your wife, your LLC), as all being alter-egos of you and your wife. At that point, all jointly held assets are subject to liability.

The best solution to protect your house is to do one of the following:

1. Form an LLC with both you and your wife as members and be careful about keeping your business and personal assets separate.

2. Operate your business as a DBA but ensure that your wife has absolutely NOTHING to do with your business from an operational or managerial standpoint.

The common address between your home and your business does not automatically pierce your veil.

However, if your wife fields calls/writes letters/signs documents with customers/vendors/etc. and lawsuit arises, there could be a claim against her personally for her own acts of negligence.

That’s why in scenario 2, where you operate as a DBA, you must ensure your wife has no involvement in the company.

Otherwise, forming a limited liability company with both of you as members will be a better strategy.

Also, as an aside, in Missouri, when a primary residence is purchased by a married couple, the default rule is that the property is owned by the couple as joint tenants in the entirety. What this means is that if a creditor has a judgment against only one spouse, they cannot take the home.

Is there a reason why your house is not owned by both you and your wife as joint tenants in the entirety?

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What Are The Tax Advantages And Disadvantages To Being An LLC?

I looking to start my own LLC and I was wondering what the tax advantages and tax disadvantages are to being an llc?

Answer

The main advantages of the LLC over the corporation are:

1. Pass-through taxation which lets you take a personal tax deduction for the (usual) early losses incurred by a startup.

2. Only a single level of taxation, instead of the corporation’s double tax of corporate income tax + tax on dividends.

Now that a new administration is taxing place, it is likely that the low dividend tax rate of 15% will expire (it was part of the Bush tax cuts), and dividends will be taxed at the highest income tax rates. That would mean a 35% corporate tax + up to a 39.6% dividend if Obama returns rates to pre-Bush (Clinton-era) tax rates.

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How Do I As Sole Member Of My LLC With The S-Corp Election Pay Myself?

How do I as sole member of my LLC with the S-corp election pay myself? Do I need to set up a payroll and go through that process?

– Brian, Colorado

Answer

When taxed as an S-corp, there might actually be an advantage in terms of Self-Employment tax by paying yourself as a W-2 payroll employee.

Each active member of an LLC which is taxed as a partnership owes Self-Employment tax on his or her share of the LLC’s net income.

If your LLC is taxed as an s-corporation, you will pay Self-Employment tax on the portion of your LLC’s net income that you receive in salary.

The rest of your income you can choose to receive as dividends–which has no Self-Employment tax.

Now, I already know what you’re thinking…”I’ll pay myself a salary of $0, and treat all my income as dividends, and therefore owe no Self-Employment tax.”

Well, guess what, the IRS already thought of that, and they require that owners of s-corporations (or LLCs taxed as s-corporations), pay themselves a “reasonable salary”.

What is a reasonable salary?

Whatever the agent auditing your LLC decides is reasonable….ok, that’s a bit cynical.

You are probably safe if you pay yourself a salary at or above the average for the job that you do for your company, in your area.

In terms of the logistics of paying yourself, you would use a payroll service for wages (salary), and a check for your dividends. No withholdings are needed on dividends, though they are on wages.

Wages/salary are deductible from the LLC’s profits as a business expense. Dividends are not deductible.

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LLCs and Divorce

My husband and I are business partners, and we also have some real estate. Our business is an S corporation, but my husband insists on getting everything under an LLC corporation, so far our relationship is fine, but we had divorce attempts in the past, so i would like to know if doing these changes will affect me in the event of a divorce.Thanks!

Answer

Divorce and ownership of assets is extremely complex, and the law is state specific (community property vs. non-community property states and so forth).

As a general rule, the titling of assets acquired during the marriage does not affect property division in the event of a divorce. Changing the titling of assets acquired PRIOR to marriage (e.g. separate, non-marital property) can convert separate assets into marital assets. Therefore, it matters when these business assets were acquired.

You will need a local attorney on this one.

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Do You Need To Include “LLC” In Your Logo And Advertisements?

Do you need to include “LLC” in your logo and advertisements as long as it is included in the legal name?

Answer

No. The letters “LLC” do not need to be in your logo.

However, I would ensure that all your legal documents–meaning contracts, leases, purchase orders, etc.–use your full LLC’s legal name, and that you sign any documents in your capacity as a member of the LLC and not personally.

In other words, you should sign as “Jenny Smith, Member XYZ, LLC.” and not merely as “Jenny Smith”.

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Lottery Winnings And The Benefits Of An LLC And Trust

If I win a large lottery amount over 30 million what are the benefits to me having a family trust or foundation and a LLC. Will I be able to pay less taxes and financially benefit others members of my family without them having to pay such high amounts of gift taxes, or any tax at at?

Answer

If you win $30 million in the lottery, hire a local attorney and accountant!

If you win $30 million and search for free advice on the internet INSTEAD OF hiring your own attorney and accountant, you are an absolute fool. If there is any justice in the Universe you will be parted with your lottery winnings as quickly as humanly possible.

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Mailbox Forwarding

If I am operating a home based business and use a mailbox forwarding service, can I use that address as my business address and registered agent address (if I am sole proprietor) when I register my business with the state?

Would I have to use my home address first when I register and then use my mailbox forwarding service. I would prefer not to get all the solicitations to my home.

Answer

Your registered agent address must be a physical, street address. I’m not sure exactly how the mailbox forwarding company you’re using is setup, so it’s unclear if it would “count” as a physical, street address for the purposes of your registered agent.

The best way to avoid too much junk mail to your home address is to use the registered agent service offered by an llc creation service.

For a reasonable annual fee, they will act as your registered agent and keep your home address off the junk mail lists (which are compiled from the public records of new businesses formed).

When dealing with your customers and suppliers, you of course use your mail forwarding service address and NOT your registered agent address.

The registered agent address is only for the state’s purposes so you can be served summons and other legal papers.

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Maine (or other state) LLC versus Delaware LLC

I need to form a company that will maintain a home office (primary office) in my personal residence in Maine (1 of 2 physical offices, the other to be located abroad), conduct business and generate revenue solely outside of the US with the exception of management/consultant services provided from my home office (about 50% of company services). I do not wish to take the revenue of the company as personal income, rather to be paid a consulting fee or dividend from company income. Company revenue will payout some fees that will go to other consultants and the company will pay for office costs and any other business related expenses. I would be and remain sole owner of the LLC with survivorship rights for my heirs. Company profit will remain with the company and may be invested in various vehicles (stocks, bonds, etc) to provide further income for the company. Would it be more advantageous to form an LLC in Delaware or Maine? Delaware has no corporate taxes, but if formed in Delaware would I need to file as a foreign entity doing business in Maine noting the business circumstance described above, or does that circumstance actually constitute doing business in Maine by virtue of maintaining an office in my home there? Thank you for your consideration.

– Bob, Maine

Answer

Your Maine office will probably count as transacting business in Maine, so you’d have to qualify as a foreign entity, particularly if you have employees at the office.

Is the LLC going to be taxed as a corporation or as a partnership?

The reason I ask is that if the LLC will be taxed as a partnership, the fact that Delaware has no corporate state tax is irrelevant because the LLC will pay no entity-level taxes anyway.

Instead, state taxes will be determined by the citizenship of the individual member receiving profits from the LLC(in your case, your citizenship in Maine).

If the LLC is taxed as a corporation, then the corporation can avoid state taxation at the entity level by incorporating in a state without state income tax on corporations. However, if you pay a salary from the LLC, then you will pay state income tax on that salary. Same if you take a dividend from the LLC.

So you will not avoid all Maine state taxes even if you form your LLC in Delaware (though you will avoid some).

As always, check with a tax adviser and attorney–I’m just a guy on the internet and I don’t give legal or financial advice, just my opinions.

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Manager Managed, Single Member LLC

Is it possible to have a single member LLC, that is managed by a another individual, that has no ownership interest in the company?

If yes, what agreements would one need?

– John, California

Answer

You can create such an arrangement, and it is called, as you accurately guessed, a “Manager Managed Single Member LLC”.

The beauty of the limited liability company is that you have great flexibility in how your LLC is managed and owned.

Management and ownership of your LLC is controlled by the Operating Agreement.

Your Operating Agreement can specify pretty much any arrangement you and the other members agree on, from profit distribution, guaranteed payments, how taxes are passed through, and more.

If you use a service like Legalzoom to form your limited liability company, they will ask you questions regarding whether you would like the LLC to be member-managed or manager-managed.

Answer those questions accordingly.

All Legalzoom LLC packages come with a customized Operating Agreement. This Operating Agreement will be a good start for most people’s purposes. If you need further help, you should consult with a California attorney to make appropriate modifications.

It will be far less expensive to have your CA attorney modify an Operating Agreement from Legalzoom than to go to have the same attorney create an Operating Agreement from scratch.

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Can You Have A Manager And A Managing Member?

Can you have a manager and a managing member?

What is the difference between the two?

– Adam, Florida

Answer

A manager, as used in the context of a “manager-managed LLC”, is a person who is not a member of the LLC who nonetheless has the power to make decisions for the LLC.

It’s equivalent to an officer at a corporation–the shareholders “own” the corporation, but the officers run it.

The other option for operating your LLC is to have it member-managed. That is, the members (owners) operate the LLC on a day-to-day basis and make decisions for it. In a company where one member is running the day to day operations while the other members are more passive, the member operating the LLC would be the “managing member”.

The details of which members have management authority for the LLC is covered in the LLC’s operating agreement. This is why it is important for all LLCs (especially those with more than 1 member) to have a written operating agreement to prevent misunderstandings about what powers and responsibilities each member has.

There are some advanced taxation topics with using a manager-managed LLC vs. a member-managed LLC. Specifically having to do with self-employment taxes and the ability for passive members to deduct losses from the LLC on their personal tax return.

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Managing Member vs Member

In a LLC structure, is there a difference of being called or titled a Managing Member vs being titled or called Member?

– Spencer, New York

Answer

All Managing Members are Members, but not all Members are Managing Members.

Managing Members are those specifically able to bind the LLC contractually. In the legal world they have “actual authority” to contract on the LLC’s behalf.

Members may or may not be able to bind the LLC contractually, and doctrines like “apparent authority” come into play.

The Managing Members should be the people who are transacting the business of the LLC, and should be thought of like the executives of the LLC.

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Multi Member LLC And Self Employment Tax

I am an employee of a company and pay my appropriate taxes through my paycheck. I also own 50% of an LLC of which I trade securities through. Do I have to pay SE taxes through the LLC even though I already pay the maximum Social Security and Medicare?

Answer

Check with your accountant, but I believe the answer is no. When you fill out your Form SE for your LLC, there is a line where you list FICA taxes paid from other sources. When you list the FICA taxes withheld from your day job (lines 8a-8d on Schedule SE to your 1040), those will be subtracted out and you’ll owe no additional FICA taxes on your LLC’s income.

Remember that Medicare taxes (2.9%) don’t have the same wage cap (currently $97,000) as Social Security, so even if you cap out on Social Security taxes at your job, you’ll owe Medicare taxes on your income above $97,000. However, you won’t have to pay Medicare twice on the first $97,000 of your income, as lines 8a-8d on Schedule SE tax form take the withholdings from your job into account.

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How Do I Start A Single Member LLC?

I have a few questions about starting an LLC.

1. Do i need resident agent ?
2. Can i put my name resident agent, i live in texas and have my apartment address which is also my LLC address
3.Veil-piercing happens to me as i m single member LLC ?
4.What to do to avoid Veil-piercing ?
5.Can i form LLC by my self ? which column or information i need to worry for Veil-piercing and for passthrough tax eligibility

6. what are the benifit to use LZ services to form an LLC

Thanks

Answer

1. Yes, every LLC requires a resident agent.

2. Yes, you can be your own resident agent, and use your home, business, or apartment address. You cannot use P.O. Boxes for your resident agent address.

3. Veil-piercing does not depend on the type of entity that you are. Veil-piercing occurs when your LLC is sued, and the plaintiff seeks to attack the personal assets of the LLC owners. In order to do this, a judge must do what’s called piercing the corporate veil.

Piercing is not a simple process. In most states, a plaintiff must show that several factors are present in order to pierce a corporate veil. These include:

  • Ignoring corporate formalities
  • Commingling corporate and personal funds
  • Zero capitalization of the LLC
  • Fraudulent siphoning of LLC funds to the owner after a lawsuit is initiated or threatened
  • Other “unjust” behavior on the part of the LLC owners

Usually it takes at least two or more of these factors to be present to pierce the corporate veil.

4. See above.

5. Yes, you can form an LLC yourself. There are three different “levels” of LLC formation, at various costs.

One, you can hire an attorney, spend a few thousand (plus state filing fees), and have an LLC formed.

Two, you can use a service like Legalzoom, and it will cost a few hundred (plus state filing fees).

Three, you can download Articles of Organization forms for free, fill them out yourself and file directly with Texas.

In terms of pass-through taxation, you simply check the box. If you use Legalzoom to form your LLC, there is a question they ask on their questionnaire asking if you want to be taxed as a partnership or a corporation.

For pass-through taxation, select “partnership” (or as a single member LLC, “disregarded entity”).

Just as a side note, many people confuse disregarded entity with veil-piercing. They have nothing to do with one another.

Disregarded entity is a term used by the IRS, which states that your LLC does not have to file a separate informational tax return. Instead, your disregarded entity LLC will record your income and expenses on your Schedule C, making your tax preparation much simpler.

I have not seen any evidence that the corporate veil of a single member LLC treated as a disregarded entity is more likely to be pierced than other LLCs.

In the end, you’re going to need to use these documents in the course of your business, so it makes sense to get it all done at the beginning, at the lowest overall cost.

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Single Member LLC Advice

I will be the only one member in my LLC.
Means only owner and only employee.
I have one full time job as well. My LLC would be IT staffing and consulting company, so I don’t need any employee and even I don’t have to work daily.
I am in Texas and wanna form llc in texas profit will be 50k

Questions

1.Do i need to take salary every week ?

2.how about tax if i have to take salary and profit is 50k

3. How many different kind of taxes i have to pay, where and when ?

4. what if my LLC dont do any business in fiscal year

5.How hard to close LLC

Thanks

Answer

Here are your questions, answered in order:

1. As a single member LLC owner and sole employee, you do not need to take a salary every week. In fact, you don’t take a “salary” at all–you simply take profits from the LLC as you earn them. This means you could pay yourself every day, or only once per year.

2. If your LLC earns a $50,000 profit, then what will happen is this $50,000 profit is recorded on your personal federal income tax form 1040, on Schedule C (I’m assuming here that you have chosen to have your LLC taxed as a disregarded entity). In addition to federal income tax, you will also have to pay self-employment tax. You calculate self-employment tax using Form SE on your 1040. Self-employment tax is the self-employed business owner’s equivalent to an employee’s Social Security and Medicare withholding taxes. Instead of withholding each pay period, as the owner of a single member LLC, you pay your self-employment tax at the end of the year with your federal income taxes.

Because you live in Texas, I’m not going to discuss state income taxes, as Texas does not levy income taxes.

3. As I said above, a single member LLC’s owner will pay federal income taxes, as well as self-employment taxes. In addition, you will have to make quarterly estimated income tax payments.

Some people think that making quarterly estimated tax payments is something employees do not have to pay. That is incorrect. As an employee, your employer withholds federal and state (except for Texas, of course) income taxes from each of your paychecks and sends the money to the IRS each quarter. In other words, your employer is an unpaid tax collector for the IRS.

As the owner of a single member LLC, you don’t have an employer to withhold your income tax payments, so you have to do it yourself.

The form for calculating your quarterly estimated taxes is Form 1040-ES (for EStimated). If you make a mistake and underpay your estimated taxes, you will be liable for interest plus a penalty of 1% per month.

TO avoid penalties for underpaying quarterly taxes, you must pay the lesser of:

A. 100% of last year’s taxes (divided equally among the four quarters); or

B. 90% of what you end up owing at the close of the current tax year.

4. If your LLC doesn’t do any business during the year, then it will not have any income or expenses to report. You simply fill out your Schedule C with zeros. It will be a very easy form to complete!

5. Closing an LLC in Texas is not difficult. The formal name for closing an LLC is called “dissolution”. In Texas, you file a Form 605 Articles of Dissolution. The filing fee as of 2008 is $40.

Other states will have similar forms (though with different names, form numbers, and filing fees).

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My K1 Shows A Net Loss Of $1000, But It Didn’t Appear To Affect My Total Taxes

I received a K1 for our new LLC. It showed a loss of $1000, but when I entered the information into TurboTax, it didn’t make a difference on my overall tax liability. I thought that I would pay taxes on a profit from the LLC but also have lower taxes if the LLC came out with a loss.

Answer

Well, it should have, unless your total tax liability was already 0.

Your thoughts are correct–profits from the LLC will increase your taxable income, while losses will reduce it.

Depending on your tax bracket, the difference in taxes will be some percentage of the change in taxable income.

single-member-llc.html

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Extension On LLC Annual Dues

Can u get a extension on the annual report dues? and if not what if i dissolve the LLC do i still have to pay the 200?

Answer

It depends on which state you’re in.

Some states do not require any annual reporting fees.

Others, such as California, have substantial franchise taxes or annual reporting fees.

single-member-llc.html

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Does A California LLC Have To File A Return?

Does a single member llc that is wholly owned by a pension or annuity plan have to file a return? Are they subject to CA’s LLC fee?

– Rebecca, California

Answer

I have never encountered an LLC wholly owned by an annuity, so I’m not sure how to answer your question.

As to your second question, about California’s LLC fee…..have you ever known California not to attempt to collect on a tax? Even one as constitutionally sketchy as their corporate franchise tax.

It’s terrible to say, but California is about the most anti-business state in the union. This isn’t a political website, but I am honestly baffled by the anti-business stance in that state. And then they wonder why jobs are fleeing and tax revenues cratering.

Move to Nevada 🙂

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I Would Like To Form A Single Member LLC

I would like to form a single member LLC. I teach bellydance and self defense, at park and recreation centers and at homes.. and want to create an LLC to insulate myself/my home from liability since my home and husband are not connected to my business. I would like to put all of my business entities under this one LLC, since all together all of my individual distributorships of products and teaching are not of high dollar amount and I would like to put all of this in one business.

How do I put all of my seperate entitites under this one LLC Umbrella. Do I rename my seperate entities one name..?
like…”blah blah blah self defense” “blah blah blah bellydance”

In total I take in $1200 to $6000. a year with all of my entitites and would like to continue to show my net profits on my joint tax return with my husband.

Thank You

– Sandra, Colorado

Answer

When you say you have difference business “entities”, do you mean that you have filed DBAs for these businesses? Have you incorporated any of them?

If not, then simply form your LLC, and operate all the businesses using that LLC.

To use a trade name for operating the businesses, you can file a DBA for your LLC for each business.

So, you could have “Weeks Enterprises, LLC” (I know, it’s not a very creative name…)

Then, you can have the LLC file a DBA for each of the sub-businesses — “Weeks Bellydancing” and “Weeks Self Defense”, and so on.

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LLC Owned By A Foreigner

Hello,
I am foreigner (non citizen or resident of US) interested in open a company in Delaware and I have few questions:
1. If I obtain an EIN and I open a bank account for my company in US I must report annually something to IRS?

2. It is possible to have a Director of the company that is an US citizen without losing the zero taxes advantage?

My LLC will not operate my business in US and the LLC will not obtain any income from US.

Thank you!

– Dan, Europe

Answer

These are some fairly in-depth international tax questions that need professional guidance.

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Do I need a SMLLC??

I have some money saved up in the future in my personal name but I am afraid of any lawsuits from past business that I did as and some documents signed in my name. Should I or can I make a SMLLC and put the money in there?? will that protect the money if anyone is suing me in my name??

– Jeff, Hawaii

Answer

No, no, that is not a good idea.

A SMLLC is a good way to protect your personal assets from a liability generated by the business which runs within the SMLLC.

A SMLLC is NOT a good place to “stash” your personal assets to avoid judgments rendered against you personally.

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Taxes For A Single Member LLC

I own a tile business and is registered as single llc.

I’m not sure if the way I file my taxes is the correct or the best way. I pay myself every month base on hourly rate. I sent my taxes every three month base on those checks. At the end of the year I do my taxes using turbotax and basically I put my gross income, my expenses and my w-2. Is this the way to do it?

Answer

As the owner of an LLC taxed as a partnership, you are not a W-2 employee.

As the owner of the LLC, you are taxed on your share (if you are the sole owner, then 100%) of the LLC’s profit.

So, you need to first enter your LLC’s revenues, subtract expenses, and determine your profit.

This is all done on your Schedule C if you are a disregarded entity single member LLC, or on a separate Form 1065 if you are filing as a partnership.

Schedule C is part of your personal 1040, and the instructions for completing it are all there.

Turbo-Tax Home and Business (not Deluxe or Premier) is the one you want to use for your single member LLC.

As a single member LLC, you are not taxed on how much you withdraw from the LLC in “pay”, but on how much profit the LLC reports based on its revenues and expenses.

It is possible, for example, if your LLC has depreciable assets (such as real estate), that you could be cash-flow positive (putting cash into your pockets each month) and yet still have zero or even negative tax liability because of depreciation expenses.

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What All Do You Need To Start A Single LLC?

What all do you need to start a single LLC? Or is it smarter to go in as a Sole Proprietorship. Not sure on what the difference is but want to be able to have everything in the business and not related to my name.

– John, Illinois

Answer

If you don’t want things in your name, then you need some type of business entity (e.g., an LLC or corporation). A sole proprietorship is a fancy word for doing business under your own name.

You start a single member LLC by forming an LLC and having only a single member (you).

If you don’t want to wrestle with the forms, a company like Legalzoom can take you through the process. It costs between $100-$300 (depending on the level of service you want) plus your state’s filing fees to form an LLC.

You can also form an LLC yourself and avoid Legalzoom’s fees by filing Articles of Organization in your home state.

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SMLLC And Banking

If a person has several SMLLCs, are they allowed to use their individual name and TIN when opening bank accounts for each SMLLC or do they have to use the SMLLC name and EIN?

The SMLLC has no employees.

Answer

I would advise that you open LLC bank accounts using the LLC’s name and EIN.

Otherwise, those accounts are in your own name, and therefore are your assets, and you really have not segregated your business and personal assets at all. It’s commingling in a serious way.

A bank might be willing to work with you on reducing fees (or eliminating them), so that having multiple accounts doesn’t eat you alive in fees. Ask around…in this environment, I think banks should be happy to get any new deposits!

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Forming An LLC For A Jewelry Business

I have a full time job, but have started making/selling jewelry. I want to make this hobby legitimate, so that I can deduct my “loses” from my income tax…as well as purchase wholesale with a federal tax ID number (EIN). Right now my expenses are more then I’m making. It seems the SMLLC is the right way to go…any advice?

– Tracy, Tennessee

Answer

The single member LLC setup will let you deduct your losses from your personal income taxes.

This is one of the big benefits to an LLC over a corporation (personal tax deduction of losses during startup, which you cannot do with a corporation).

One thing I need to clarify you on, though. When it comes to wholesale purchasing, you are likely going to need a sales tax ID from your state in addition to an EIN.

The sales tax ID allows your wholesalers to sell to you without charging sales tax.

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Does A SMLLC Need To File For A FEIN?

Does the SMLLC need to file for a FEIN?
I provide a “middle-man” service for several companies and some ask for a EIN for their tax records. What do I give?

Answer

Your LLC needs to have an EIN (employer identification number).

Your only other alternative is to use your personal social security number.

There are two ways to get it (one free method, one paid):

1. Follow the directions on how to obtain an EIN yourself.

2. Use LegalZoom or BizFilings service

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How To Change From Schedule C To Single Member LLC?

What process is necessary for an individual who has been self-employed for the past 10 years but would like to become a single member llc in order to reduce liability?

– Steve, New York

Answer

I assume by your question that by “self-employed” you mean that you have been operating your business as a sole proprietorship for the past 10 years.

The simple answer is that you form an LLC and begin operating your business through your LLC. Here is an overview of the steps:

1. Form your LLC by filing Articles of Organization with your state.

2. File form SS-4 with the IRS so you can get your EIN (Employer Identification Number; also called an FEIN for Federal EIN). Even if you don’t have employees, your EIN is analogous to a social security number for your LLC, and you’ll need it to open a business bank account, among other things.

3. Open a business bank account in the name of your LLC, using your EIN.

4. All of your future business related expenses should come out of your business checking account, and all of your business income should be deposited there.

5. As your LLC earns a profit, you can write a check from your LLC’s business checking account to yourself. You do not need to do withholding taxes (but don’t get too excited, you still have to pay self-employment tax at the end of the year).

6. As a single member LLC, you are treated by the IRS as a disregarded entity, meaning that you don’t have to file a separate informational return for the LLC. Instead, all of your revenues and expenses are recorded on your Schedule C. Which, from your question, is something you are familiar with.

Steps 1 and 2 can be performed for you at a reasonable charge by a company like LegalZoom.

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Do I Need To File A Return For An LLC That Did No Business?

Do I need to file a return for an LLC that did no business at all in 2008? LLC is between me and my three brothers. No revenue, no expenses, no activity at all.

Answer

You probably ought to file a return showing zero income, zero expenses, particularly if the LLC has filed returns in the past.

It’s very easy for the IRS to have their computers run a check to see if every business that filed in 2007 filed in 2008. For the ones that did not, they are going to ask you “why not”?

Simply file a Form 1065 return with all zeroes (if that is accurate), issue the K-1s to each member, and be done with it.

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Need To Include Investors In My LLC?

Hello. Great website with a lot of information.

Here’s my scenario: I have not yet created my LLC yet. I am attempting to buy a small multifamily property – 16 units. For the down payment, I have 8 investors (mainly family members and close friends) that are each going to put up $10,000. I will pay them back with a lump sum including a nice interest rate. They could be silent partners but I do not wish to include them in the LLC. Do I need to? Should I set up a separate LLC just for them? What other legal form or documentation could be set up so that they are at ease with loaning me the money? Any advise is greatly appreciated.

– Rob, Texas

Answer

If you want them to actually own a percentage of the property, then they should be members of the “main” LLC. There is no need to create a separate LLC just for the investors.

On the other hand, if they are merely lenders, then you’ll need signed promissory notes by which the LLC agrees to repay the loans plus interest.

From your description of the business arrangement between you and your friends that you’re going to repay the principal plus interest, it sounds like this is a lender-borrower relationship and not a co-ownership situation.

Texas is a deed of trust state, so your lenders might insist on a deed of trust on the property to secure the promissory notes.

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What Is The Next Step After Filing My LLC?

Once I have filed my Articles of Organization and obtained my EIN, what is the next step? Do I need to acquire a separate business license from the state, or does this cover it? What about registering the name of my company with local and state officials?

Thank you in advance for your help!
– Heidi, Illinois

Answer

As far as registering your name with state and local officials, filing your Articles of Organization has already done that.

With regards to business licenses, it depends on the type of business and where you live.

For example, if you are opening a bar, then you’d probably need a local liquor license, fire and health inspection of the premises, etc.

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Can We Have No Capital Accounts Based On Equal Membership Interests?

Hello,

Our LLC of three members would like to have equal ownership and membership control, regardless of capital contributions made by individuals. What one pays in belongs to all, so to speak. There are three members, and all decisions made must be unanimous, and ownership is based on the number of members, in this case each member owns one-third of the company, assets, debts, etc.

Based on that, we would like to craft an op agreement that does not require capital accounts and the associated tracking, only a statement that the members own they cut in based on 100% divided by the # of members, period.

Info:

We are based in CO.
We are an entertainment company that either publishes or sells publishing rights for various media – no physical goods.

Thanks!

J.S.

Answer

The members of an LLC can agree to essentially any distribution and ownership scheme they wish, including the one outlined above.

Of course, there might be tax consequences to the different members based on the allocations. Therefore, you should consult a tax attorney who specializes in partnership and closely held corporation tax.

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No Operating Agreement

In December of 2008, we ended the corporation that had Articles of Incorportation. On the advice of our accountant we created a new LLC, however, we did not complete an operating agreement. What are the dangers in this? As well as, since we are married and in business together… what proof do I have that I actually own a portion of the business (in case he tells me to hit the road)…

– Julie, Kansas

Answer

The dangers in not creating a written operating agreement is that your LLC will be governed by the state LLC statute in which you formed your LLC.

In your situation, Kansas.

Do you know Kansas’s LLC statute off the top of your head? Neither do I.

That’s the danger–you have no idea what your rights are in the LLC because they are controlled by Kansas’ LLC statute.

In terms of proof of ownership, are you listed as a member in the Articles of Organization? If not, you’re going to have to find other documents that evidence your ownership.

Evidence of your ownership could include things like: being listed on the business bank account as a signatory, emails from the other members where they speak as if you’re an owner, contracts with third parties where you signed as an owner, loan documents for the company listing you as an owner and guarantor, and so on.

However, an operating agreement is the best way of showing ownership in the LLC.

While creating an LLC yourself by downloading filing Articles of Organization is cheaper than paying Legalzoom to do it for you, you miss out on valuable features like an operating agreement.

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No Operating Agreement Signed Yet After 6 Months?

Started an LLC just over 6 months ago. My husband and myself along with another husband and wife.

Having disagreements on the operating agreement from the beginning. Went to an attorney, who happened to be their (our partners) family friend.

Had our attorney look over it and make our necessary changes. Gave them our changes and never heard anything again.

When we started its written on scratch paper by our accountant, who formed our LLC online through LegalZoom.com. The paper stated the LLC is managed by all operating members, meaning our partners wife was not going to work.

Husband 1 has 51%
Husband 2 (my family) has 49%
Than each gave the wives 20% out of their share.

Business has been good, $300,000 billed out since we have started in last week of May 2007.

Here’s the kicker for me. Unfortunately my husband trusts everybody! I DON’T! From day one, even though its written 51/49, everything has been 50/50 when it comes to money being put into the company.

Now, our partner says today “How far you want to take this, I think we need to dump in a lot of money to get this business rolling and I know you don’t have it?”

Then interrupted by a phone call and said we would discuss this later….

I knew it from day one that he would do this. To be honest, he is a bored millionaire and now he doesn’t need us. I’m furious!!!

Guess what I need to know is are we screwed, in every sense, since we never got our operating agreement done??

Trying to find some answers and not be taken advantage of.
– Donna, Nebraska

Answer

There are a couple of ways to answer this, and I’m sure other will comment as well.

Without an operating agreement, your state’s default rules kick in to determine profit and loss sharing.

In most states, profits and losses in an LLC are split proportionally to either ownership interest or capital contributions. This is unlike a partnership, where it’s presumed 50-50 unless there’s a writing to the contrary.

We’re only talking about a 1% difference in your situation, but I think the bigger concern is that you feel you’re getting squeezed out of your company by the fact that your other members are requiring capital contributions in excess of your capacity.

Operating agreements cover issues like ongoing capital contributions, which is one of the reasons you were smart to get a local attorney to draft one for you. Unfortunately, many people are more eager to run their business than sign contracts, and your OA is sitting unsigned.

I would talk to your attorney to determine your state’s default rules and see if you’re required to make additional capital contributions, and if not, what the effect is of your partner making additional contributions (does their ownership interest increase, or do they merely have first right to withdraw their additional capital contributions before you can draw profits?)

Eventually I’m going to create a new section on this site summarizing the default rules by state, as these become very important when dealing with partners and non-existent operating agreements (if you’re operating a single-member LLC, you can simply change your rules along the way by signing a new agreement with yourself).

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Does The Operating Agreement Need To Be Notarized?

Does the Operating Agreement need to be notarized? If not, how do you know that the person who prepared it did not just change it and put the signature page at the end?

– Cory, Arizona

Answer

On long contracts (which an Operating Agreement essentially is–a contract among members of the limited liability company), it is common to have a space on the bottom of each page for the parties to initial.

That way, you can avoid concern over pages being inserted in the middle, with the signature page remaining the same. If a page were inserted, the initials would be missing.

By the way, notarization wouldn’t help in that situation, as a party could simply replace pages after the signature page was notarized.

I am not aware of any state law which requires Operating Agreements to be notarized in order to be enforceable among the parties.

Swapping pages in a contract is very blatant fraud. Hopefully, you will not do business with those kinds of people.

One way to protect yourself is to create a paper trail of drafts of the documents as you exchange them during negotiations. In the event of litigation, you’d have evidence to support your story that pages were swapped.

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One LLC Owning Another LLC

Hello there,

My business partner and I are in the process of buying a business. We want to set up one LLC to actually be the purchasing party.This will be a single member LLC in the name of my partner only.
We would then like to set up a second LLC that will hopefully act as the parent company and will own all of the assets of the original LLC.

How will I proceed with this set up. Will I need to set up the parent company first or at the same time.

Thanks

Answer

Setup the LLC to be owned by your partner first and purchase the business.

Then, form the second LLC.

You will then transfer ownership of the first LLC to the second LLC by having the second LLC purchase your partner’s membership interest (aka shares) of the first.

Now you will have LLC-1 whose membership interest is entirely owned by LLC-2. LLC-2’s membership interest will be owned by you and your partner in whatever proportions you decide.

You will need to memorialize these transfers in writing with appropriate legal documents.

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Operating Agreement For LLC Engaged In Stock And Forex Investing

Want to form and LLC that will invest and trade in stocks and possibly later in the forex markets.

Will start off with myself and one investor.

I want to maintain control over all aspects of the business, the investor will be passive. However, profit will be allocated based on percentage of capital contributed.

I presume this is possible and I presume this will require an Operating Agreement.

Would such an Operating Agreement need to be completely written from scratch or will one of the online sites like legal zoom be able to handle this?

Also, if in the future a few more investors want to contribute capital and become members, would the operating agreement need to be revised – or can it be written to permit additional investors to join in the future?

Thanks.

– Austin, Indiana

Answer

You are proposing is entirely possible. Pretty much any arrangement you can think of can be accomplished in an LLC, if you draft the operating agreement accordingly.

Then, take that operating agreement to a local attorney who specializes in small business transactional issues, and have him/her review it. Explain to the attorney exactly what you are trying to accomplish with respect to your investors, payouts, etc. (similar to what you described in your question).

Have him/her verify that the operating agreement does that. If changes need to be made, then let the attorney make them.

While it seems like adding an extra step, this process I just described will be FAR FAR cheaper than just going to an attorney and asking her to draft an operating agreement from scratch.

Good luck!

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Operating Agreement For NJ LLC (Single Or Multi)

Hello I have registered an LLC in the state of NJ in 2000 and being sole member I didn’t care to create an operating agreement till I have the need now to produce one.

Though I am the only member, if I want to add more in the future, how shall I structure my operating agreement?

If I create a Single member Operating agreement, Can I be able to change it later to reflect multi-member? Does this operating agreement need to be submitted with the state authorities or IRS? Appreciate if you could share some light on this.

– Roger, New Jersey

Answer

The IRS does not need a copy of your operating agreement, and neither does the state.

However, the operating agreement is the document that governs the relationship between the members of the LLC, and between the LLC and its members.

Without a written operating agreement, the default rules of your state govern your relationship with your fellow members and between you and the LLC.

Regarding your question about amending an operating agreement–yes, you absolutely can amend it. In fact, it is extremely common to amend and/or restate operating agreements.

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Operating Agreement for Texas LLC

I have a Texas LLC with two members. One member wants to resign and I will remain as a single member LLC.

Because members can not resign LLC member in Texas – I understand, I need an Operating Agreement – which operation agreement is required for this type situation.

Answer

You’re going to need an Operating Agreement that has as one of its provisions the ability for a member to resign.

Don’t confuse “Operating Agreement” with Articles of Organization–they are two different things entirely. Articles of Organization create your LLC as a legal entity with the state. However, they don’t define how your LLC operates–that’s what the Operating Agreement is for.

You’re going to need to have an Operating Agreement drawn up in order to resign from the Texas LLC.

If you used an attorney to form the LLC, then use him or her to create and Operating Agreement and have you resign as a member.

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Operating As An LLC In Another State

If I formed my llc in a state but have chosen to do most of my business in another state, do I file all over again in the new state?

– Norman, New Orleans

Answer

If you are actually “transacting” business in another state (state #2), you need to register as a foreign LLC in the new state.

The meaning of “transacting business” is defined by state statute.

Most states do not define what is considered transaction of business by a foreign LLC. Instead, they have a list of activities that do not require registration (I know, strange).

For example, here is Arizona’s statute regarding foreign registration (none of the following activities requires registration):

      1. Maintaining, defending or settling any proceeding.
      2. Holding meetings of the board of directors or members or carrying on other activities concerning internal corporate affairs.
      3. Maintaining bank accounts.
      4. Maintaining offices or agencies for the transfer, exchange and registration of memberships or securities or maintaining trustees or depositaries with respect to those securities.
      5. Selling through independent contractors.
      6. Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts.
      7. Creating or acquiring indebtedness, mortgages and security interests in real or personal property.
      8. Securing or collecting debts or enforcing mortgages and security interests in property securing the same.
      9. Owning, without more, real or personal property.
      10. Conducting an isolated transaction that is completed within thirty days and that is not one in the course of repeated transactions of a like nature.
      11. Conducting affairs in interstate commerce.
      12. Being a limited partner of a limited partnership or a member of a limited liability company.

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Using An LLC For The Ownership Of Rental Properties

I own a couple of homes that I rent out to long-term tenants. I’d like to form an LLC to protect myself from lawsuits by the tenants. My question is regarding ownership of the homes. Should ownership be transferred to the LLC rather than myself, as it is now?

On one hand it seems that doing that would put the homes as assets at risk because they would no longer be behind the corporate veil. But on the other hand if I maintain them in my name, would that present a co-mingling problem that might be used to pierce the corporate veil?

I would try to get around the latter by taking the rent in and putting it in an LLC account, and then using those funds to pay the mortgage, property tax and insurance payments.

How should I proceed?

Answer

If you own the rental property now, in your own name, you are entirely exposed to personal liability for anything arising out of the ownership of the property. This means tenant lawsuits, environmental cleanup, code violations, etc.

Both the rental property itself is exposed to judgments, and you are personally liable (e.g. they could garnish your wages from a job you have outside of owning the rental homes).

If you transfer the ownership to an LLC, then you have a layer of insulation between you and liabilities from the property.

The homes themselves, of course, would be exposed to judgments.

In order to make that layer solid, you need to treat the rental property as if it is actually owned by the LLC, meaning that the LLC:

*Collects the rent;
*Pays the utilities, taxes, etc.

There is no veil-piercing issue if the rental homes are owned by the LLC, the rental income and expenses are received and paid by the LLC, and the LLC’s assets are kept separate from your own (except for distributions of LLC’s profits to yourself, obviously).

Followup Question

How do the potential costs weigh against the lack of protection, for using a single llc to cover multiple properties?

Answer

Costs of multiple LLCs are:

1. Annual filing fees (depends on your state–California has a notoriously high annual filing fee for each LLC).

2. Preparation of tax returns for each LLC.

3. Cost of preparing annual reports (this requirement varies by state–some states do not require annual reports).

4. Cost of accounting for each LLC.

Benefit of multiple LLCs is that risk from one property is isolated from other properties. This benefit is harder to quantify until you have some liability arising from your property, such as environmental contamination.

In my experience, most serious investors form a separate LLC for each property. In many cases, lenders will require that a separate entity be formed for the property and that no other properties are owned in that entity, so as to protect their collateral from having other claims attached to it.

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Paying A Spouse Who Works For Your LLC

In a single member llc can the llc pay wages to the member spouse? and if so what taxes are they subject to?

Answer

Your LLC can pay W-2 wages to any non-member that does work for it.

This includes your spouse and children.

As an employer, the LLC will be responsible for the whole gamut of taxes required of any employers. That means the employer share of Social Security and Medicare taxes, withholding of state and federal income taxes, and so on. I strongly recommend you use a payroll service from a company such as Quickbooks Payroll to handle this for you if you go this route.

The other alternative, if the spouse qualifies, is to pay the spouse as an independent contractor. In that case, the spouse would receive a 1099 at the end of the year and would pay the same taxes any 1099 person must–state, federal, and self-employment.

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Paying Members Of An LLC For Services Performed

Is it possible for a Member of an LLC to become an employee of the Company and receive a regular salary?

In a related question, I have an LLC that received a grant, and part of the grant funds salaries and benefits. If the payee through the grant is a Member of the LLC, are these payments considered salaries, taxable to the LLC?

Thanks,
Michael

Answer

Yes, you can.

When an LLC pays an active member a salary for services performed, it’s called a “guaranteed payment”.

However, the IRS places limits on how much an LLC can pay a member as a salary and how much is considered return of profits.

The IRS requirement is that the amount of teh salary for active LLC members must be reasonable in light of the services actually performed. In other words, if you pay a member $250,000 a year to sweep the floors, that won’t fly.

But, if you were to pay the prevailing local wage/salary for the job function performed, then there is no reason for the IRS succeed in challenging you.

See IRS Publication 535, Chapter 2 for more info.

Remember that the LLC is permitted to deduct the salary paid to members from its revenue to determine the amount of its profits.

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Do I Need A W-2 As A Single-Member LLC With No Employees?

Do I need a W-2 as a Single-member LLC with no employees? how do I pay myself and file my taxes?

Answer

You pay yourself by writing a check from the LLC to yourself. Profit distribution.

You file your taxes by reporting your LLC’s revenues and expenses on Schedule C of your 1040 tax return.

Because the LLC is a pass-through taxed entity, you don’t have to withhold taxes on each distribution from the LLC to its member.

Do not setup a W-2 for yourself as sole member of the SMLLC. It’s incorrect, confusing, and costly.

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Should I Pay Wages If The LLC Isn’t Profitable?

If I have a single member llc and i am the owner of the entity and the entity is not profitable. Should i still pay wages and issue a W2 to my self to protect against piercing. Can i just have a due to account on the books for accrued compensation to show that i will eventually get paid by the entity.

Answer

Before I can answer your question, I need to ask you a few:

If the entity is not profitable, how are you funding your paychecks?

Are you borrowing money from a bank or other lender?

Are you lending your own money to the llc and taking back a note?

Are you accruing expenses to outside vendors but not paying them, and instead paying yourself?

If you pay yourself “W2” wages (as opposed to taking a draw from your llc’s profits), remember that the llc must withhold payroll taxes, pay its share of payroll taxes, and make quarterly deposits of the same.

Comments
Good follow up questions, but you did not provide answers….
What is the implication if you loan personal start-up funds to your LLC and then it is not profitable? I would assume your “pay” is just a loan repayment. Should you charge your LLC interest, at a reasonable rate, so you will actually make some money from your LLC?

I would assume at some point the LLC makes money, but what is the implication if you need an additional loan to keep the LLC running? Can you keep loaning personal money to the LLC while simultaneously withdrawing loan payments (with interest) back to yourself?

Answer

Extending a loan is not a taxable event for either party.

Repayment of loans are not taxable either (for either party).

So your LLC can keep taking losses while making payments on old loans, and you can extend additional loans as well.

Be sure to create a paper trail in the form of promissory notes for the loans, and identify the payments as loan repayments (make up a payment schedule as well). Charge a reasonable rate of interest.

If the LLC is losing money, a tax deduction from the loss will flow through to the owners. This is regardless of whether the LLC has money in the bank due to additional loans.

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Payroll Tax Responsibilities Of An LLC

Can a single member LLC elect to be treated as a Sub S by electing under Form 2553 and pay himself/herself a “reasonable compensation” salary and receive the balance as K-1 profit. Or is all of the income from a single member LLC, electing Sub S status subject to FICA/MED .Is this where I’ll see your response? http://www.llc-made-easy.com/single-member-llc.html

Answer

If you select sub-S classification, then your “reasonable” compensation will be subject to FICA/MED, also known as self-employment taxes.

The remainder of the LLC’s profits can be distributed as dividends, which are still subject to income tax, but not self-employment tax.

The problem with electing sub-S classification is that there are more rules for sub-S than for an LLC taxed as a partnership or sole proprietor.

For example, every owner of an S corporation must be a natural person (not another LLC, corporation or partnership). If you add partners to your SMLLC, and you wish to allocate profits unevenly between yourselves, then you will lose your S-corp status.

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Personal Judgements And Assets In An LLC

If I have an LLC, am sued personally, can they come after assets in my LLC to satisfy a personal judgment? Thank you.

– Mike, Washington

Answer

Not directly, but indirectly.

The assets of the LLC are not yours, but your interest in the LLC is, and can be attached.

For example, if you own shares of Microsoft, and a judgment is rendered against you, the creditor can seize your stock in Microsoft.

But they can’t seize Microsoft’s assets (buildings, unsold copies of Vista sitting in warehouses, etc.)

What the creditor can do is get a charging order against your interest in the LLC such that if the LLC makes payments to its members, then the creditor will get those payments and not you. It’s similar to garnishing wages.

Your operating agreement can be written to prevent a creditor who seizes your LLC membership interest from exercising voting rights or any control over the business’ daily operations. This is a core concept of the llc’s asset protection.

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Payroll Taxes For PLLC vs PC

I formed a pc and now realize i have to pay myself via payroll and deduct taxes and send to irs etc…if I convert to a pllc can I take draws as I please and just pay taxes at the end of the year like it did b4 ? w/out dealing w eftps and sending taxes ….

Answer

Just to clarify for other readers:

“pc” means Professional Corporation. A Professional Corporation is essentially a corporation whose owners are all members of a particular profession, usually licensed by the state (such as lawyers, accountants, doctors, etc.), and where the purpose of the corporation is to provide such professional services.

A “PLLC” is similar in that it is an LLC whose members are licensed professionals and the purpose of the PLLC is to provide such professional services.

Each state has its own list of what occupations are considered “professions”.

As an LLC owner, you can take draws instead of a salary.

Like all taxpayers, LLC (or PLLC) members must pay quarterly estimated taxes, which can be calculated using Form 1040 ES.

Your self-employment taxes (which is the self-employed business owner’s version of the Social Security and Medicare taxes taken out of an employee’s paycheck) are calculated using Form 1040 SE.

Depending on your income level and amount of taxes owed the previous year, you might be required to pay estimated quarterly taxes.

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What Is My Personal Liability If The LLC Goes Under?

What are my legal rights if my business is failing and I owe advertising expenses? Can they attack my personal credit and can I be held liable with no income?

– David, New Jersey

Answer

Whether you are personally liable for your LLC’s debts, including an advertising contract, depends on the contract itself.

Who are the parties to the contract–the LLC or you personally?

Did you sign the contract as “David, Member XYZ, LLC” or did you sign it personally (or is it ambiguous whether you signed it personally or on behalf of the LLC?)

Did you personally guarantee the LLC’s performance of the contract? (This is unusual for typical business purchases, but more common when a bank is lending money to an LLC and when the LLC is entering a lease).

Most business credit cards that are issued to new businesses require the owner’s personal guarantee. A personal guarantee of a debt means that you are liable. Look carefully at your credit application–if it asked for your personal social security number and other personal information, the fine print probably obligates you to pay.

Business owners can also be personally liable for unpaid withholding taxes on employee wages/salaries. If you have employees, you need to use a reputable payroll service. Withholding taxes are not your business’ piggybank! So many businesses get in trouble trying to get through a rough patch by “borrowing” from withholding taxes. Your business is far better off borrowing from a business credit card or line of credit than trying to borrow from withholding taxes, hoping to get the money back by the end of the quarter.

As to the second part of your question, can you be held liable and what if you have no income?

You can be personally liable if you personally agreed to pay the charges (see above). In order to enforce that liability, they must sue you, prove their case and get a judgment.

In order to collect on that judgment, they need to find assets of yours. If you have no assets and no income, the judgment will be difficult to collect. If you declare bankruptcy, the judgment will be eliminated after the discharge (they may receive some return on their debt, depending on what happens in bankruptcy).

If you have been sued personally, see an attorney. It’s possible that they have no claim against you and it can be dismissed.

If they have reported this debt to credit agencies on your personal credit, and yet you are not personally liable, you need to contact the credit agencies and have them correct your report.

Whether these vendors are vindictive or simply uninformed, any damage done needs to be fixed.

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What Are The Pro’s And Con’s Of Multiple LLCs?

What are the pro’s and con’s of multiple LLCs?

Answer

Cons

Let’s start with the cons first.

The most obvious con of multiple LLCs is cost.

It costs money to form your LLC, and some states charge an annual fee (such as California’s $800 franchise tax on LLCs and other entities) for each LLC.

There is also a con in the sense of additional administrative work, particularly at tax time.

Every multi-member LLC must either file a Form 1065 annually (for those taxed as partnerships) or a Form 1120 (for LLCs taxed as corporations).

Then, each multi-member LLC must issue K-1s to all the members.

So, if you have multiple LLCs, you’re going to have multiple tax filings and K-1s flying around.

Pros

The biggest pro of having multiple LLCs is the liability protection.

This is particularly the case with real estate.

We have clients that are commercial developers, and every new development is a separate LLC. Often times, each phase of the development will be a separate LLC, as will there be separate LLCs for the commercial and residential portions in a mixed-use, planned community (such as new-urbanism communities).

The reason for separating your real estate into separate LLCs is so if there is a problem with one piece of property, the liabilities caused by the property don’t affect your other assets.

We’re not talking only about the proverbial “slip and fall” case. While the prospect of someone falling and injuring themselves on your property is a common concern portrayed by the media, one of the biggest risks to owning property is environmental.

Environmental cleanup costs can often exceed the value of the particular piece of property. And you don’t have to be at fault to be liable for cleanups–if there is contamination at your property, the government will hold the owner responsible. If someone else caused the problem (such as a “midnight dumper”), then you are free to pursue them. But in the meantime, the government expects you to pay.

If all your properties are owned in a single LLC, then a problem at one of them can wipe out your equity in all the rest.

The worst situation is to own real estate in your own name. (other than your personal residence. The second worst is to own all your real estate in one entity.

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Questions About Personally Funding Your New LLC

You have to use your money to start your business. Is it wise to put your money in your business bank account when you first open it and then proceed to purchase things for your business out of that account to be able to track everything accurately for taxes and other breaks?

Answer

Absolutely!

You do NOT want to put your startup business expenses on a personal credit card. That would technically be commingling of funds (though, in reality, it takes a lot to pierce the corporate veil, so don’t lose too much sleep over it).

—Note—
The above does NOT apply to the expenses you incur in forming your LLC. Obviously you won’t have a business credit card or business account before your form your LLC. So, formation costs and state filing fees you can pay personally. Buying equipment for your business after it is formed…use a business check or credit card.
—Note—

It’s bad business practice to mix your personal and business funds. Even if a judge wouldn’t pierce your veil for mere sloppy business practice (though you’re rolling the dice, because you never know what kind of judge you’ll get), why be sloppy?

You can pay for the initial LLC formation with personal funds, as the company does not yet exist. Those expenses can be considered a capital contribution to the LLC.

After formation, and you have an EIN, go directly to the bank and open up a business checking account. You’ll need the EIN because banks won’t open an account without one.

All of your business expenses must be written out of your business checking account.

If you need a credit card for your business, then apply for a business credit card. Trust me, you’ll start getting offers in the mail very quickly after forming your LLC–particularly if you use your home address as your registered agent.

Will your business need a Paypal account? Then get one in your business’ name, using your business EIN.

Finally, buy a copy of Quickbooks and use it to track your business expenses.

If you have employees, you absolutely need to use a payroll service. Do not attempt payroll on your own…trying to do your own payroll is like trying to do your own laser eye surgery.

As owner, you are personally liable for all payroll taxes that you fail to pay. These debts are difficult to discharge in bankruptcy and the IRS can follow you around for a long time, racking up penalties and interest.

A followup question on the same topic:

Funding Your New LLC

Question: Can you continuously put money into your business account from your personal account to fund your business like to purchase equipment and pay for utilities until you start receiving a profit from it? Would that be perceived as commingling?

Answer

Yes, you can fund your business with personal funds (in fact, every business has to even if just to pay for incorporation, legal, accounting and state filing fees).

The key here is to understand that “you” and the LLC are legally separate individuals.

Which means that if you are giving money to your LLC, you need to be getting something in return — either you are making a capital contribution to the LLC or you are loaning it money.

You wouldn’t give money to some random corporation unless you got either stock or a bond in return–the same principle applies here.

The key is to create the proper paper trail, in particular, through the use of promissory notes if you are treating the deposit as a loan.

There are many forms of promissory notes you can download for free on the internet, and some you can pay for.

More followup questions
Using personal account to buy equipment for business

Question: Ex boss is selling equipment from his business at great price.He is giving us first pick before he auctions it off. Problem is LLC paperwork will not be processed in time to be able to open a business account to pay for it. Can we use personal account to purchase equipment as start up or would that be commingling of funds. He won’t hold the equipment.

Answer

You can buy the equipment with personal funds and then sell them to the LLC. Just make sure to writeup a receipt and have the LLC pay you for the equipment.

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Is A Single Member LLC A Reasonably Good Means Of Protecting Personal Assets?

Given the very high cost of liability insurance for certain types of law practices, is a single member llc a reasonably good means of protecting personal assets?

Answer

If you are worried about malpractice as a solo attorney, it’s unlikely an LLC alone will protect you, as you would be personally liable for your OWN professional negligence.

That said, if there are multiple attorneys in your practice, then you absolutely want to form an entity other than a general partnership. In a general partnership, you would be personally liable for your partner’s malpractice, in addition to your own.

That’s a terrible situation to put yourself in.

Therefore, also every law firm these days is either limited partnership, limited liability partnership, professional corporation (basically a corporation), or LLC.

Nonetheless, an LLC will protect you from other, non-malpractice liability such as contractual disputes arising from your business and possible tort liability for things like a slip-and-fall at your office.

Purchasing malpractice aka professional liability insurance is probably a very good idea.

I do know of some professionals that practice “naked” (without malpractice insurance) where they are married, in joint tenancy by the entireties states, with all their assets in joint name with their spouse. There are many potential cons to this arrangement, but people still do it to save on insurance premiums.

Nurse Practitioner

by Lisa
(MO)

Hello, I work as an independent contractor as a nurse practitioner for a doctor.

I get no taxes removed from my pay. I have personal liability insurance. I have thought of incorporating to make sure if ever I was sued (hopefully never), that my personal assets would be safe.

1) Is this true?
2) Would I be a single member LLC

I have also been told that if I make myself an employee of my incorporation that would further protect myself.
What do you think?

Answer

Incorporating probably will NOT protect you from medical malpractice liability for your own negligence. This is why you must always keep your malpractice premiums current.

The only advantage incorporating (vs. a partnership) has for professionals is that you will not be personally liable for your partner’s malpractice (though the company might be). If you don’t have partners, then this isn’t an issue for you.

As a single member LLC, you would still be personally liable for your own medical negligence in the O.R. or where ever else you are performing medical treatment.

Where the LLC could protect you is if your practice has contractual disputes–say with your employer, supplier, or landlord–and therefore limit their recovery to your LLC assets.

So, for example, suppose you lease office space for your practice. By having the lease under your LLC and not you personally, you could avoid personal liability if you are sued under the lease.

Note that you’ll have to negotiate hard to get a landlord to lease property to your LLC without a personal guarantee.

If you are involved in a lot of transactions (like leasing real estate, or buying large amounts of supplies/equipment), it might be worth it to form an LLC.

However, forming an LLC will not protect you from medical malpractice claims. Have a good insurance policy.

Also, you would probably have to form a Professional LLC, if you are performing medical services in Missouri.

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Do We Need An Operating Agreement For A Real Estate LLC?

I am forming a real estate LLC with my wife. Do we need an operating agreement? We split the ownership 50%-50%.
Thank you

– Francisco,  Texas

Answer

You really ought to have an operating agreement for your limited liability company.

While Texas law does not require you to have an operating agreement (they are called “company agreements” in Texas), it is nonetheless a good idea to have one.

Many banks will require you to show a copy of your operating agreement in order to open an account. If your LLC tries to borrow money, a lender will almost certainly want to see that the LLC is authorized to do so under its operating agreement.

When you form an LLC with Legalzoom, they include a customized operating agreement in the price of forming your LLC.

While you can have an attorney draft an operating agreement for you, it will be far more expensive than having one made as part of an LLC formation package from a company such as Legalzoom.

If your business operations become very complicated and you need a more customized operating agreement, you will save money by having your attorney modify your existing agreement rather than trying to create a document from scratch at the beginning when cash is tight and you’re not 100% certain what provisions you need anyway.

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Registered Agent Questions

hi,
I wish to be the registered agent to my llc company in Virginia.

What is the form do I need to fill in and submit to VA state corporation commission ?

Do I need to mail this to
Clerk of the State Corporation Commission
P.O. Box 1197
Richmond, Virginia 23218-1197

Thanks

Answer

Assuming that you have already formed your Virginia LLC, you can request a change of registered agent form here:

http://www.scc.virginia.gov/clk/ElectronicFormRequest.aspx

If you have not formed your Virginia LLC yet, then you will name your registered agent on line 4 of your Articles of Organization, which you can download in .PDF format below:

Virginia Articles of Organization.

For those with LLC’s outside of Virginia, the same situation applies.

If you have not already filed your Articles of Organization, then that is where you will select your registered agent.

If you already have filed, most states have a form you can file to change/update your registered agent address.

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How Do You Remove An LLC Member?

My question is this, me and my wife are 50/50 partnership of our llc we do file a 1065 and k-1.

My wife has a full time job with another company and I run our business. Due to the economy if her company closes at the end of 2009 we want her to be able to collect unemployment.

So my understanding is that as long as she is a business owner she can not collect. How would I dissolve her interest and what steps are needed and time to dissolve.

Thanks.

– Mike, Nevada

Answer

Are you certain she cannot collect unemployment simply because she owns a membership interest in the LLC?

I understand that if she were claiming unemployment due to losing her job at your own business, she might not collect unemployment. But if she is a W-2 employee for a different company, merely owning shares/a membership interest shouldn’t disqualify her.

I mean, if you own 1 share of Microsoft, you are technically a “business owner”–that surely does not preclude you from collecting unemployment.

Be that as it may, assuming that she really must exit the LLC, here’s what you need to do:

      Amend the operating agreement to remove her as a member.
      Amend the articles of organization. (some states require filing of amended articles, some do not).
      Draft and sign a resolution authorizing her to sell/transfer her membership interest in the LLC to you.

See a licensed attorney to draft up those documents.

Legalzoom can prepare both the above types of documents (amendment of articles of organization and amendment to operating agreement).

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How Can I Resign From A LLC?

Myself and another person wanted to open a restaurant. We applied for an LLC and a Hotel and restaurant license. I had some trouble with financing and decide to step out. The other person is still in the process of opening the business. I need to know what to do as far getting my name off the LLC and rest. license so I am not liable for anything.

Answer

I think you’re going to need to see a Florida attorney who is familiar with small business issues in order to properly disassociate yourself from the LLC.

Dissolving the LLC entirely is simpler than removing yourself as a member. The process for removing a member depends on both state law and/or the contents of the LLC’s operating agreement.

Therefore, you’ll need an attorney–particularly if you signed documents related to applying for financing (loan applications, promissory notes, guarantees, etc.)

When choosing your attorney, you need to realize that attorneys specialize. You need an attorney who specializes in closely-held business matters.

Understand that merely being a member of an LLC will not make you liable for the debts of the LLC. In fact, that’s the main purpose of creating such an entity.

Therefore, supposing the other members go and borrow money for the restaurant, and it fails, the mere fact that you’re a member won’t make you liable on the loan.

In practice, when the LLC attempts to borrow money, the bank will want personal guarantees from all the members. When they ask for your guarantee and you refuse, they will have to deal with letting you resign as a member or lose the loan. It is an excellent point of leverage for you in that situation.

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Salary, Banking And Expenses – Self-Employed Vs LLC

I am a self employed consultant but currently do all my work for one company and the pay is deposited directly to my personal checking account.

When I change to a single member LLC would the process be to open an account with the llc name, have the company make out the check to the llc name, deposit it to the llc account and then transfer my “salary” (basically all of the pay) into my personal account?

What document should my “salary” and these banking withdraw rights be stated on to maintain the integrity of the llc benefits?

Do I pay estimated tax or perhaps a life insurance premium out of the llc account or my personal account if married filing jointly?

– Janet, Maryland

Answer

You essentially have the process down:

1. Form your single member LLC.

2. Open a business checking account in your LLC’s name.

3. Have checks from your clients made out to your LLC.

4. Deposit those checks into your LLC bank account.

In addition to these steps, you also want to pay all your business-related expenses from your LLC checking account.

That means everything from web hosting to postage, to parking, to rent for an office space.

Assuming that your LLC makes money after all expenses, you can distribute those profits to yourself at any time.

The process for distributing profits from your LLC to yourself personally is simple — write a check from the LLC’s bank account to yourself personally.

This is not technically a “salary”, in the sense that the LLC must withhold taxes.

Remember than an LLC is a pass-through tax entity. Any profits or losses from the LLC flow through directly to your personal income tax forms through the Schedule C (assuming a single member LLC).

Write “profit distribution” or something similar in your LLC’s check to yourself.

In terms of risks to your corporate veil, this would only be an issue if your LLC was operating at a loss, and yet you kept writing checks to yourself, thus defrauding your LLC’s creditors.

But, if your LLC is turning a profit, you clearly have the right to withdraw that profit personally.

The key is to keep good accounts for your LLC.

Because your LLC doesn’t withhold taxes for you like an employer would, you must pay estimated taxes on your own.

An explanation of quarterly estimated taxes, and the forms, are found at www.irs.gov , search for “Form 1040 ES”.

First, as for benefits, an LLC, unlike a corporation, cannot pay benefits such as life or health insurance premiums. The LLC can of course pay all business-related expenses, but life insurance, for example, is a personal benefit that should not be paid from the LLC account, it is not a deductible LLC expense. (Imagine this taken to the extreme: you could decide your LLC provides you housing, a car, meals, etc.)

On the subject of operating and payment documentation, I understand that none is required, especially for a single-member LLC. However, an Operating Agreement can’t hurt, and this is were profit distributions could be spelled out, if desired. And, certainly keep a record of the “profit distribution” payments.

You cannot deduct personal expenses from your LLC’s revenues to reduce its profits (or increase losses).

In other words, its not which entity that writes the check that determines deductibility, but rather the nature of the expense.

Business expenses are deductible, personal expenses are not.

When it comes to health insurance premiums,however, you CAN take a deduction for premiums paid if your were self-employed and show a profit on your Schedule C.

See line 29 of your Form 1040.

From the IRS:

“You may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents if any of the following applies.

1. You were self-employed and had a net profit for the year.
2. You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
3. You received wages in 2005 from an S corporation in which you were a more-than-2% shareholder. Health insurance benefits paid for you may be shown in Form W-2, box 14.”

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Sale of LLC Member Interests

What if I decide later to sell 50% of my SMLLC. Would it be sold as a member interest? If not, what would I be selling exactly? Or, can I even bring in a “partner” in this structure since the name itself indicates a single member?

Answer

An LLC with one member is a “single member LLC”. By selling half your member interest to another person, the LLC is now a multi-member LLC. A membership interest in an LLC is an asset which can be sold just like stock in a c-corporation.

Check with your accountant to determine the tax implications of selling an LLC membership interest–you might show either a gain or loss on the sale of that interest (just like you would selling stock in a corporation). Depending on how long you held that interest before selling it, the sale could be classified as either a long term or short term capital gain.

After the sale, while the LLC would no longer technically be a single-member LLC, you would not have to refile your Articles of Organization or anything like that.  Most states do require annual reports from all LLCs, and some of those reports include listing all members of the LLC.

The only change you might have to make is if the LLC was previously filing its taxes as a disregarded entity, the LLC would now have to file a an annual partnership tax return (Form 1065) and issue K-1s to each member. The pass-through taxation would remain the same (unless you specifically elect otherwise and file the appropriate tax forms).

Finally, when your company takes on a new member for the first time, you should review the LLC’s operating agreement carefully. Oftentimes, an LLC that starts out as a single member will have a simplified operating agreement.

Once additional members are present, your operating agreement should reflect the issues that having additional members causes.

For example, if a member wants to sell their interest, do the other members get right of first refusal to purchase the shares before an outsider does?

How are profits divided? Do you take into account the fact that the founding member invested money in the LLC before the new member joined?

Just a few things to think over in putting together your deal.

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Self Employment Tax and S Corp Status

I have a few questions.

It is to my understanding that a LLC owner must pay self employment tax. If I file a form with the IRS to treat me as a S-corp, will this avoid the SE tax?

In order to treat my LLC as a S-Corp, do I need to file form 2553? or must I file both Form 8832 and 2553?

Also if I am elected as S-corp (but still organized under a LLC) can I still have disproportional distributions of income among the member-owners?

Answer

As an S-Corp, it is true that you do not have to pay self employment tax on dividends paid to the owners.

However, the IRS knows about this loophole and requires S-Corporation owners to pay themselves a “reasonable” salary–which IS subject to self-employment tax.

So you can’t entirely avoid self-employment tax with an S-corp, you could possibly reduce it if your LLC’s profits exceed what is a “reasonable” salary (as determined by the IRS) and you can therefore take some of your profits as a non-self-employment tax dividend.

In addition, Obamacare has enacted a 3.8% Medicare tax on dividends, so even S corps that distribute income as dividends do not avoid all self employer taxes.

File the 2553 timely and you do not have to file an 8832 (see the bottom left to top middle of page 4 of Form 8832).

You CANNOT make unequal distributions to S-corporation shareholders.

One of the qualifications for an S-corporation is that it has only one class of stock. If you make unequal (meaning, disproportionate–e.g. if someone owns 10% of the stock they get something other than 10% of the profits) distributions, you have created multiple classes of stock and now you are a double-taxed corporation.

To keep your S-corporation status, you must distribute the same number of dollars per share to every shareholder, otherwise you lose it.

This is part of the reason why many multi-member LLCs choose to be taxed as partnerships, rather than S-corporations, despite the ability to partially shelter some S-corporation profit (but not all) from self-employment tax.

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Sell an LLC

Can I sell our LLC without an operating agreement we never did one (stupid yes) my partner is non responsive since we had a little tiff. I am the manager of the llc and he of course is a member. he is just wanting to be a hard ass since I know he needs the money worst than me It doesn’t make any since I have a buyer that has presented an offer that I would accept. Please help

– Makr, Florida

Answer

Yes, you can sell an LLC without an operating agreement.

However, you also have the issue of getting your partner to sell his share–either to you or to the new buyer.

See a Florida lawyer about forcing a buyout of the other member’s share.

Because you don’t have an operating agreement, Florida law controls, and not being a Florida lawyer, I don’t know what it says or how Florida courts interpret it (which can sometimes be two different things).

The other solution, if Florida law permits, is to sell your share without selling the other member’s. I doubt that your new buyer will be interested in “buying a lawsuit”, but you never know.

Unfortunately, this is why you need to have an operating agreement. I won’t lecture you because you already apologized 😉

However, remember why you formed an LLC–to reduce risk.

Well, a big risk in business are disputes with partners. A good way to reduce that risk is to get your agreement in writing.

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Single Member LLC – Texas – Franchise Tax

Do single member LLC’s in Texas avoid the payment of the Texas franchise tax (margin tax)?

– Joe, Texas

Answer

Unfortunately, no.

According to the the Texas Comptroller’s site, the Franchise Tax is imposed on the following:

      The franchise tax is imposed on each corporation that is chartered in Texas and each non-Texas corporation that does business in Texas. See Franchise Tax Rule 3.546 for a list of some activities considered to be “doing business in Texas.”
      For franchise tax purposes, the term “corporation” also includes a bank, state limited banking association, savings and loan association,

limited liability company

      , professional limited liability company, a corporation that elects to be an S corporation for federal income tax purposes, and a professional corporation. Professional associations and partnerships are not subject to the franchise tax.

There is some good news for small Texas businesses, however:

    Corporations will not owe any tax if the gross receipts from their entire business for both taxable capital and taxable earned surplus are each less than $150,000 during the period upon which the tax is based. These corporations must file an abbreviated information report.

See the Texas Comptroller’s page for more information about the Texas Franchise Tax.

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Single Member LLC owned by an S corp

We were recently told by our accountants that we could contribute our single member llc to a newly formed s corp. They told us that my husband would still remain the single member. That does not make sense to me b/c he contributed the LLC to the S corp for 100% ownership in the s corp.

Wouldn’t the new member be the S corp?

And can we pay my husband wages through the LLC? (now that it’s owned by the s corp, can issue his wages through the LLC instead of the s corp)

I believe that the llc will will flow through all of it’s income/expenses onto the s corp return. correct?

Answer

It’s a little unclear what your accountant is suggesting.

Is the SMLLC to become a shareholder in the s-corporation?

Or did you mean to say “convert” your SMLLC to an s-corporation taxation?

The general rule is that only natural persons can be shareholders of s-corps (no LLCs or corporations).

Perhaps there is a new letter ruling that makes an exception for SMLLCs, and this is what the accountant is referring to.

Does the SMLLC have significant assets which would cause tax issues by changing form to another type of entity?

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Single Member LLC Pay Owner

As a single member Nevada limited liability co is there a general rule of thumb of how much one ought to pay themself as owner?

Answer

As a single-member LLC, you can be treated as a disregarded entity by the IRS and therefore there are no limits or requirements on how much of the LLC’s profits you can pay yourself from.

Instead, you will be taxed on all the LLC’s profits whether you take a draw or not. This is different from S-corps, where there are complicated rules on minimum salaries and “accumulated earnings tax” if you leave too much money in the corporation.

You don’t need to worry about those issues with an LLC. From a business perspective, you should probably leave enough money in the LLC to act as working capital. Again, this is a business decision, and you might choose to utilize credit rather than forgo personal income.

As an LLC, you are permitted to elect S-Corporation tax status by using IRS Form 2553. It is beyond the scope of this page to discuss the detailed pros and cons of s-corporation status for your LLC.

Generally, the pro of s-corporation status from a tax standpoint is that you could avoid Medicare taxes on the business’s income by recieving it as a dividend instead of either a salary or self-employment income. Update: The Affordable Care Act has enacted a medicare tax on dividends for many taxpayers.

The major con of s-corporation tax status is that there are restrictions on the types of owners of an s-corp and the number of owners.

Converting an ongoing business to s-corporation status can have tax conequences, so you really need to have an accountant familiar with small business accounting (NOT the guy who does 1040-EZs for 2 months a year for one of the tax-return mills) look at your situation.

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Single Member LLC Taxation

I am trying to figure out how I will be taxed as a single member LLC.

Which forms do I need to use? When I pay myself, how much to I need to withhold for income tax? I understand that an LLC can be taxed as a sole proprietor but does that change if I give myself a salary or commission? Will I be taxed on both the profit from the llc and the income that I pay myself? Does that make any sense?

Any insight would be greatly appreciated.

Thank you

Answer

Let’s start from the top down.

As a single member LLC, you can choose to be taxed as a disregarded entity.

This means that you use a Schedule C to report all your income and expenses and arrive at a net profit or loss.

This net profit is what you pay taxes on. Hence, you want to maximize your legitimate business expenses on your Schedule C.

The LLC is not taxed separately as a company at the entity level–that is the purpose of using a pass-through entity like an LLC or partnership instead of a c corporation.

In terms of paying yourself out of LLC profits, the simplest way is to simply write yourself a check.

No payroll, no withholdings.

Now, understand that you will have to make quarterly estimated income tax payments. Everyone makes quarterly estimate income tax payments (it’s just as an employee, your employer does it for you, so you don’t know that it’s happening–except that your paycheck is smaller…)

To figure out the right amount to withhold, it’s helpful to use software like Turbotax.

In addition to income tax, you will also report Self-Employment tax. You are required to pay this at the end of the year.

It is calculated based on your Schedule C and a separate Schedule for calculating the exact amount of your SE taxes. Coincidentally, your self-employment tax is reported on Form SE.

So, the forms needed to do your taxes for a single member LLC taxed as a disregarded entity (i.e. as a sole proprietor), you’ll need:

* Schedule C
* Schedule SE
* Form 1040
* Your appropriate state tax forms

Other Reader Question:

1. My husband and I are co-owners of an LLC. Is this considered a multi-member LLC for tax purposes?

2. In order to take advantage of HRA 105 for health insurance premiums, we are interested in changing the LLC to a single member, with my husband as owner and me as employee. We live in PA. However, I have done some reading on the internet and am concerned that the single member LLC will not be considered a partnership LLC for tax purposes, and that the veil can be pierced. Can you advise on this?

Answer

1. It can be, or it can be considered a disregarded entity by the IRS, and taxed as a sole proprietorship.

2. There is some confusion about being taxed as a partnership for single member LLCs. In the sense that you get pass-through taxation, SMLLCs and multi-member LLCs are both taxed as partnerships.

The difference is how the tax is reported. If you are a multi-member LLC, the LLC files an informational partnership return, Form 1065. It then distributes K-1s to each partner, which is used by each partner to complete their 1040.

With a SMLLC, you don’t file a Form 1065 + K-1s, but instead list all your business expenses and revenues on Schedule C of your 1040. It cuts out on step of paperwork.

In the situation where both members of the LLC are husband and wife, filing a joint tax return, you can see that whether you do a 1065 + K-1, or report the figures directly on the Schedule C, the final number in terms of tax owed is the same.

So the IRS lets multi-member LLCs whose sole members are husband and wife filing jointly to file as a disregarded entity.

As far as veil piercing, being a single member LLC, in of itself, is not a factor in piercing the corporate veil.

If you follow the basic corporate rules (keep separate personal and business bank accounts; don’t commit fraud, etc.), there is little risk of veil piercing.

Veil piercing is unlikely to occur due to an innocent “mistake” by the company owners–it’s an extraordinary remedy, and usually employed by courts only when the owners are committing obvious fraud on their corporate creditors.

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Single Member With Multiple LLC’s Can You Use One Check Book?

We file as sole Prop. on our taxes. We have multiple LLC’s and use only one checkbook. Do we need to set up other checkbooks for each LLC?

Answer

Each limited liability company should have its own bank account–otherwise, you are clearly commingling funds and you’ll lose all liability insulation between the LLCs. In other words, if you’re not going to have separate bank accounts for each LLC, then you might as well just run all those businesses in the same entity.

If each LLC has its own bank account, but you keep track of expenses and revenue using a single checkbook, then that shouldn’t be a problem.

Other Visitor Questions About Multiple LLCs

Question

If I have three distinct LLC’s, am I better off having one LLC or Corp own the three or just run them all separately? Thanks

Answer

If you’ve already formed 3 LLCs, you’re asking if you should form a fourth to act as a “parent” LLC.

I don’t see any compelling reason to create another entity. If you have an advisor (such as an attorney or accountant) who can articulate a good reason for creating a 4th entity, then you should follow their advice.

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Single-Member LLC Veil Piercing Protection

I am in the process of filing to form my LLC company. I was going to file for it to be treated as a single-member LLC, but how real is the possibility of veil-piercing? Can this be solved by filing for the LLC to be treated as a Corporation instead?

– Sergio, Texas

Answer

I am not aware of any caselaw where a judge has held that the mere fact of being a single member LLC alone was a factor in deciding to pierce the corporate veil. There is some caselaw out there on the issue of reverse veil piercing. In reverse veil piercing, the single member has personal debts and tries to prevent his personal creditors from getting at the LLC’s assets.

The method of taxation (corporate vs. partnership), should have no bearing on veil piercing.

Veil piercing is an extraordinary remedy, which will only be used when there is clear indication of fraud by the owner and corporation.

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SMLLC – Treated With Corporate Taxation

I recently formed an SMLLC but I plan to elect corporate tax treatment on the Form 8832. What sort of disadvantages should I expect by electing to be taxed as a corporation? I already filed an SS-4 and received an EIN. I do not plan to have any employees but wanted the tax ID to conduct business with certain entities requiring it.

Second question, each year if I elect to be taxed like a corporation what forms will I have to file (formed in Delaware, doing business only in North Carolina).

Third question, if taxed as a corporate entity how do I distribute profits to my personal account? Do I execute payroll or simple transfer it and report the earning on my personal tax return? Finally, what are the tax rates of a corporation?

– Jay, North Carolina

Answer

I’m interested in why you chose to be taxed as a corporation rather than as a partnership. Did someone suggest this to you, or did you read about it somewhere?

By choosing corporate taxation, your LLC will be taxed first at the corporate level, based on the LLC’s profits and losses. This will be reported on a corporate tax return and the taxes paid by the LLC.

Corporate tax rates start at 15% and go up to as high as 38%. I’ll post a chart soon, because this is common question.

In addition to corporate tax, when you distribute your corporation’s profits to yourself in the form of dividends, you will be taxed on those dividends as well. These dividends will be reported on your personal income tax return.

The scenario I just described above is what is called “double taxation”, and why many people choose entities like LLCs and partnerships–which are pass-through entities–instead of corporations.

You were correct in obtaining an EIN–every LLC needs an EIN, even if you don’t plan on having employees.

How to pay yourself as owner of an LLC…

There are two ways to pay yourself as the owner/member of an LLC.

The first is to put yourself on the payroll, and pay yourself like you would an employee. That means withholding taxes and the rest. Your LLC would have to setup itself with quarterly deposits of payroll taxes to the government. This is complicated and a hassle, which is why there are specialized companies like ADP which do payroll processing for you. Quickbooks/Intuit also has a payroll processing service for small businesses.

The other way to pay yourself, if your LLC is taxed as a partnership or a disregarded entity, is to simply write yourself a check from your business account to your personal account.

In partnership language this is called a partner’s “draw”. The advantage is that there is no withholding taxes or any of the other payroll complications.

Don’t get too excited, though–you still have to pay self-employment tax at the end of the year, and are required to make quarterly estimated taxes on your federal income tax. However, you have a little more control over the timing of your payments.

With your SMLLC taxed as a disregarded entity, you don’t file a separate tax return for your LLC. Instead, all your LLC’s income and expenses are reported on your Schedule C. Your total profit on your Schedule C is then made part of your personal 1040 return, and total tax owed (including self-employment tax, if any) is calculated from there.

Some people are confused by the term “disregarded entity”, thinking that it means that their SMLLC doesn’t exist, or doesn’t give them limited liability protection.

That’s not true. Disregarded entity is a term of art only for federal income taxation purposes, and has nothing to do with the limited liability protection of your LLC.

So long as you are diligent about keeping separate business and personal accounts, don’t commingle funds, observe LLC corporate formalities (which are less rigorous than c corporation formalities), and don’t commit fraud, your SMLLC corporate veil should stay intact and is not weakened by being considered a disregarded entity by the IRS.

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How To Answer The Specific Purpose Question When Forming A Missouri LLC

In Missouri, it asks for your “specific purpose” of doing business. If you put something, for example online selling, does that mean that in the future if you decide to sell art work from your home or out of a brick and mortar that you couldn’t do it from that business?

Thanks.

– Jackie, Missouri

Answer

In the old days, corporations had very defined statements of purpose.

If the corporation performed business activities not defined in their corporate charters and/or articles of incorporation, these acts would be considered ultra vires, and voidable by the company under certain conditions.

This could cause a lot of problems for anyone dealing with that business–they would literally have to read the corporate charter before engaging in a transaction.

That sounds confusing, right? Well, you’re not the only one confused. Which is why many states, including Missouri in your example, permit the following to be used in describing your LLC’s business purpose:

2. The article listing the purpose or purposes should include at least one sentence which defines the specific purpose for which the company is organized (for example, what it will do to make a profit). You may also include, if desired, a purpose statement such as

“and all other legal acts permitted limited liability companies.”

Taken from Missouri limited liability company Articles of Organization Instructions.

So, here’s your solution. Enter one sentence explaining your business’s main activity as you think it will be now. Then, add the following language to the end of the sentence:

“and all other legal acts permitted limited liability companies.”

If you are forming a real estate holding company, for example, it could read:

To purchase, sell, hold, own, and operate real property within the state of Missouri and and all other legal acts permitted limited liability companies.

This will protect you in case your business direction changes over time.

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Does A Spouse Have To Be Listed As A LLC Member For Liability Protection?

If an LLC protects a person’s personal assets from liability does a spouse have to be listed as a member to also be protected even if not involved in the business? Or can just the spouse running the business be listed?

– Carrie, Minnesota

Answer

A limited liability does not “protect” your personal assets by virtue of you being listed as a member. The LLC protects you because it isn’t you–its debts are its own.

Just as you are not responsible for your neighbor’s debts or my debts, you are not responsible for an LLC’s debts.

Think of a member of an LLC as a shareholder in a company. If I’m a shareholder in Microsoft, I’m not responsible for Microsoft’s debts. If I’m not a shareholder in Microsoft, I’m still not responsible for its debts. The reason I’m a shareholder is because I own a piece of the company and share in its profits.

Therefore, if you want your spouse to own part of the limited liability company, then she/he should be a member. If not, then they should not be a member.

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State Filing Number vs. EIN?

I heard that along with obtaining your EIN for federal you are also supposed to apply for a state filing number.

It would make since considering you pay state and federal taxes when you work for your employer, but I haven’t heard how you would go about doing this or if this is true.

I just thought that you automatically received a state number when you register your LLC. Do I have to apply for a state number and if so how do I go about this?

– Missouri

Answer

There is no state equivalent to your limited liability company’s EIN (employer identification number).

Just like you file your personal state taxes using your social security number, your LLC’s state taxes (which are passed through to you anyway), use your federal EIN.

You might be thinking of a state sales tax number. As the name implies, this is for sales tax, not income tax. Each state has a different procedure for applying for sales tax ids for resellers.

If you are purchasing products for resale, then your suppliers will probably ask for a state sales tax resale number. This allows them to sell products to you at wholesale without charging you sales tax.

For businesses that do not sell sales-taxable items (such as most services), you do not need a state sales tax ID.

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Succession Planning

Is “succession planning” in an operating agreement essentially a section that deals with the transfer of membership interest in the event a member wishes to sell their interest, dies, is declared incompetent or goes bankrupt?

If those events are covered, does the operating agreement “provide for succession?”

Or, does providing for succession involve more specifics as to what qualifications a new member must have in order to become a voting member versus an assignee?

– Laurie, Texas

Answer

Most “template” operating agreements have transfer of membership interest provisions that essentially state that if a membership interest is transferred involuntarily, the transferee does not have voting rights unless the other members agree.

A provision like the above gives the LLC charging order protection, and is an asset protection tool. There is some adverse caselaw (in the bankruptcy context) when single member LLCs try this technique. Advanced asset protection is a tricky area of the law, and prone to abuse.

As a general rule, once you start getting into the finer details of clauses in operating agreements, you really need to think about consulting an attorney.

Services like Legalzoom and their cohorts are excellent resources for routine filings such as setting up your LLC and acting as registered agent and even for giving you a template operating agreement.

When you get into asset protection and the like, you must consult an attorney. Drafting a complex contract based on what “some guy on the internet” told you is foolish–even if “that guy” is me!

My suggestion is that you use online services like Legalzoom to do the routine filings, and use the savings from that to hire an attorney to write a customized operating agreement for your LLC.

An LLC membership interest is an asset like a share of stock, and in that sense, upon the death of the owner, it will be distributed according to the decedent’s will (or in the absence of a will, via state law). What rights the person inheriting the membership interest will have in terms of control of the LLC, voting rights, the right to force distributions of profits and so forth, is determined by the operating agreement. That is where the asset protection issues discussed above come into play.

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Taxes On An Inactive LLC

If an single member LLC is formed in Ohio, but does nothing within the first year besides set up bank accounts and other infrastructure activities, what tax forms, if any, are required to be filed by the single member? ie: No money is moved between the LLC any anyone besides the initial investment.

Answer

You’ll file a tax return showing what the LLC did.

I assume by “inactive” you mean the LLC did not earn any revenue.

However, it may have incurred expenses, which means the LLC showed a loss, which can be deducted on your personal tax return and reduce your tax liability.

If you don’t file a return for an LLC which lost money, then you are leaving deductions on the table and overpaying on your personal taxes.

For example, did the LLC pay any bank fees? Order checks? Those are expenses, which can be deducted.

If you are a single member LLC, use Schedule C on your 1040 to record your LLC’s income ($0) and expenses ($X). The LLC will show a loss, which will translate into a deduction on your 1040.

State Franchise Taxes and Annual Report Fees

Your question did not exclude state-imposed “franchise” taxes on your LLC or annual reporting fees.

Fortunately for you, Ohio is one of about a dozen states that do not impose any annual reporting requirements (and associated fees) or any annual LLC franchise taxes. These franchise taxes are in addition to your normal state and federal income tax, and are imposed based on the LLC’s income or assets.

Some states impose a minimum franchise tax even if assets and income are 0 (e.g. California’s $800 minimum annual franchise tax).

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Transfer Of Voting Rights

We want to protect our voting rights as members if a member dies. Its ok with us if a spouse or other person inherits the ownership but not the voting power. Can we stipulate in the operating agreement that if a member dies, her or his votes are distributed to the other members in proportion to their ownership shares?

– Sharon, Hawaii

Answer

Yes you can, sort of.

You can craft an operating agreement that gives the other members the first right of refusal to purchase the membership interests in the event a member dies.

The operating agreement can also specify that new members must be voted in or otherwise approved by existing members in order to have decision making power in the company.

However, I strongly suggest that you contact a licensed attorney in your state who is experienced in drafting LLC operating agreements.

The type of legal work you’re describing is not for do-it-yourselfers unless you happen to be an attorney who has drafted these documents before.

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Transfering An LLC From Connecticut to Florida

I currently have an llc in the state of CT, and I will be moving to Florida shortly. I would like to know if the llc can be transferred and how much it will cost.

Answer

I’m assuming that the CT llc’s business will be operated in Florida once you move.

If the business is not being operated in the new state (for example, the CT LLC owns a piece of real estate in CT that obviously will remain in CT after you move) then you need to change nothing. There is nothing preventing a Florida resident from owning stock in a CT LLC or corporation.

On the other hand, if the LLC is actually going to be operating in Florida, then you’ll need to get the CT LLC qualified as a “foreign corporation” in Florida. So you wouldn’t be transferring from Connecticut to Florida so much as becoming a Florida AND Connecticut LLC.

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Transferring Single Member LLC To Another Person

My LLC is a single member LLC- 100% ownership is mine. I would like to transfer complete ownership to someone else (relative). Can I just make a transfer document and do it or do I have to redraft the operating agreement?

What other requirements are there for transfer?

Answer

You’re going to need to do the following:

1. Assign your interest in the LLC to the buyer.

2. Amend the Operating Agreement to add the buyer as a member and remove the seller as a member.

3. Amend the Articles of Organization with the state (only some states require this, for example, Arizona does).

4. Draft a resolution of the members of the LLC approving the sale of the interest.

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Unsigned Operating Agreements

I have been with a company 14 months where another person filed the company registration papers with the state. A partnership agreement was draw up sent to my attorney we countered and ultimately the agreement was never agreed to or signed. Does that mean there is no partnership? What are my legal rights/risks in IL to walk away from the company?

Answer

Is this a “partnership” or an LLC? I’m going to assume it’s an LLC, and that you are using “partnership” in the colloquial and not legal sense. If they were drawn up by an attorney for an LLC, they would be labeled an “Operating Agreement”.

You need to verify whether these “registration papers” were Articles of Organization (for an LLC) vs. the formation of a limited partnership under Illinois law.

First off, you really need to see a licensed Illinois attorney who is familiar with LLC and closely held business disputes (e.g. not the guy who fixed your DUI).

But, you can get yourself familiar with the overall picture, so you can follow your lawyer’s reasoning.

Without a signed Operating Agreement, you’re stuck with the “default” rules in Illinois under the Illinois Limited Liability Company Act.

805 ILCS 180/et. seq.

You can view the entire act here (grab a cup of coffee–you’ll have a tough time staying awake reading this):

Illinois Limited Liability Company Act

You want to look at section 805 ILCS 180/35-50&70 (Dissolution/Dissociation).

Unsigned llc operating agreement legal?

by chris
(new hampshire)

I wish to leave an llc I have been a part of for a few months now. An operating agreement was drawn up but never signed by either party.

Is there any action I need to take at this point? I have not signed any documents, agreements, etc associating me with this llc, everything has been verbal and in good faith.

Can I simply walk away?

Thanks,
Chris

Answer

Is your name listed on the Articles of Organization?

Is your name on any bank accounts of the LLC, or have you signed any leases, opened a credit card, or any other activity that associates your name with the company?

If the answer to any of the above is yes, then the safest route is to formally remove yourself as a member.

Because you don’t have a signed operating agreement with the other members of your LLC, you are at the mercy of New Hampshire’s default LLC statutes.

You’re going to need to see a New Hampshire attorney about this one to draft documents complying with NH law.

Another question about unsigned operating agreements:

What are the possible downfalls of not having ones name on an LLC , when you have a partnership?

(New York)

I own a business in NY and an LLC was formed in CT by my partner (where he resides) for this business. His is the only name listed on the LLC, but he is as I said a partner in the NY business. Will the fact that my name is not on the LLC have any repercussions on the business (or me personally for that matter) should the business ever become for sale, or, if there are any possible royalties incoming from an entity that may want to “buy-in” or invest in the property?

Answer

Some questions for you:

1. After the CT limited liability company was formed, did you transfer the assets of the NY business into the CT LLC? In other words, does the CT LLC own anything?

2. What form was the NY business in before your created the CT LLC? (e.g. did you have a partnership, a sole proprietorship, a corporation, etc.).

3. If the NY business was an incorporated entity, are there documents showing a purchase of the the NY business by the CT LLC?

Your interest in the LLC is not determined by who is listed in the Articles of Organization. It is determined by how many membership interests you own.

You should have documentation in your Operating Agreement stating what percentage of the LLC you own. If the LLC started out with your partner owning 100%, and then you purchased 50% of the membership interests, there should be a purchase and sale agreement for the membership interests.

Unsigned operating agreement

by David Smith

(Atlantic beach, Florida)

What is the legal standing of an unsigned Florida LLC operating agreement. I believe that no company is formed and the document can be change at will until signing.

Answer

I think you are confusing Articles of Organization with an operating agreement (don’t feel stupid, these are common mistakes).

No LLC is formed until the Articles of Organization are filed with, and accepted by, the state of Florida.

If Articles have been filed and accepted, a company is formed.

The operating agreement governs how the LLC will be run. An unsigned operating agreement is not going to be binding (though an oral operating agreement is binding in some states), and therefore Florida’s default LLC rules will govern the LLC.

Whether the operating agreement is signed or unsigned, it can be amended by written consent of all the parties to it.

Is this operating contract valid?

In March 2008, A, B and C, who are all US citizens based in San Francisco, enter into an Operating Agreement for their newly formed California Limited Liability Company. Each of the parties has signed the agreement by logging into a website with their personal username and password and clicking on an ‘Agree’ button after having the chance to scroll through and read the agreement.

Answer

I would ask an attorney about this one. There might be an electronic signature act that covers these types of agreements.

Is there no paper document as well?

Courts are very old fashioned, and they like paper (if this were to ever go to court).

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Is An Unsigned LLC Operating Agreement Legal?

I wish to leave an llc I have been a part of for a few months now. An operating agreement was drawn up but never signed by either party.

Is there any action I need to take at this point? I have not signed any documents, agreements, etc associating me with this llc, everything has been verbal and in good faith.

Can I simply walk away?

Thanks,
– Chris, New Hampshire

Answer

Is your name listed on the Articles of Organization?

Is your name on any bank accounts of the LLC, or have you signed any leases, opened a credit card, or any other activity that associates your name with the company?

If the answer to any of the above is yes, then the safest route is to formally remove yourself as a member.

Because you don’t have a signed operating agreement with the other members of your LLC, you are at the mercy of New Hampshire’s default LLC statutes.

You’re going to need to see a New Hampshire attorney about this one to draft documents complying with NH law.

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What Are The Possible Downfalls Of Not Having One’s Name On An LLC

I own a business in NY and an LLC was formed in CT by my partner (where he resides) for this business. His is the only name listed on the LLC, but he is as I said a partner in the NY business. Will the fact that my name is not on the LLC have any repercussions on the business (or me personally for that matter) should the business ever become for sale, or, if there are any possible royalties incoming from an entity that may want to “buy-in” or invest in the property?

Answer

Some questions for you:

1. After the CT limited liability company was formed, did you transfer the assets of the NY business into the CT LLC? In other words, does the CT LLC own anything?

2. What form was the NY business in before your created the CT LLC? (e.g. did you have a partnership, a sole proprietorship, a corporation, etc.).

3. If the NY business was an incorporated entity, are there documents showing a purchase of the the NY business by the CT LLC?

Your interest in the LLC is not determined by who is listed in the Articles of Organization. It is determined by how many membership interests you own.

You should have documentation in your Operating Agreement stating what percentage of the LLC you own. If the LLC started out with your partner owning 100%, and then you purchased 50% of the membership interests, there should be a purchase and sale agreement for the membership interests.

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What Is The Legal Standing Of An Unsigned LLC?

What is the legal standing of an unsigned Florida LLC operating agreement. I believe that no company is formed and the document can be change at will until signing.

Answer

I think you are confusing Articles of Organization with an operating agreement (don’t feel stupid, these are common mistakes).

No LLC is formed until the Articles of Organization are filed with, and accepted by, the state of Florida.

If Articles have been filed and accepted, a company is formed.

The operating agreement governs how the LLC will be run. An unsigned operating agreement is not going to be binding (though an oral operating agreement is binding in some states), and therefore Florida’s default LLC rules will govern the LLC.

Whether the operating agreement is signed or unsigned, it can be amended by written consent of all the parties to it.

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Do I Have To Put LLC After My Business Name?

1. Do I have to put LLC after my business name?

2. I am an artist, putting together a plan to open my own gallery. Is LLC the best option for me? The research I have done point in this direction.

Answers

1. Yes. Or you can use variations such as “L.L.C.”, “Limited Liability Company”.

2. An LLC is a good option for many small businesses.

In your particular business–an art gallery–there is some considerable risk. For example, contract disputes with artists/buyers, liability for damaged works, a rogue business partner who makes unrealistic promises to buyers/artists, and so on.

All these things can–if you are unincorporated or a general partnership–expose your personal assets to loss.

If you are starting this gallery with a partner, I strongly suggest that you form an LLC, and NOT a general partnership. Otherwise, if the relationship sours, you can be held personally liable for actions of your ex-partner made on behalf of the partnership.

Furthermore, if you are going into business with a partner, you need an Operating Agreement.

Don’t skimp on this!

You can save a couple bucks filing your Articles of Organization yourself. However, you cannot draft your own Operating Agreement (unless you happen to be an experienced business lawyer in addition to your other trade).

Either find yourself a trusted attorney, with experience in LLC Operating Agreements, to draft one for you.

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Is There A Danger Of Using My Home Address As The Registered Agent?

When forming an LLC my home address was used as there was no office space as yet to list. Will this compromise the LLC and enable anyone to claim against the home address in case of loss?

Answer

The short answer is no.

The use of a home address alone for your registered agent address will not cause your corporate veil to be pierced.

Piercing the corporate veil is an extreme remedy, and it usually takes multiple factors–including fraud by the owners/officers of the entity–to cause a court to pierce the veil.

The biggest disadvantage to listing your home address is that you will now get a ton of junk mail to your home, because your LLC filing is public knowledge and marketers can purchase list of newly formed companies.

Every state has a website where any person can search the name of a corporation or limited liability company and see, at minimum, the registered agent address. Some states further require annual filings listing the officers of a corporation, and that information is also public.

But at minimum, your registered agent address is always publicly visible. Furthermore, most states let anyone view the change history to an LLC’s registered or resident agent. If you want to keep your connection to an LLC private for some reason, then you should use an outside provider as your registered agent and not your home address.

Also, if your company is ever sued, the summons will be served at your home, which might cause embarrassment.

For example, I had a client who was sued in federal court by an out-of-state bank on a defaulted business loan, and the bank decided to have the US Marshall serve the summons instead of using a private process server. The client was obviously upset, scared and embarrassed as her neighbors saw federal agents in marked vehicles outside her home and in this world, people are likely to think she did something criminal rather than a mere lawsuit on a business loan.

You can always change your registered agent to one of the many registered agent services available in every state, such as Legal Zoom’s. They usually charge anywhere from $75-$200 per year, depending on the level of services provided and who you choose to use.

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Visitors Questions Answered About Texas LLC

Do members of LLC had to added to LLC at the time of filing or operating agreement is enough to show the ownership of a given member.

We are 10 friends who are trying to form a LLC and question is whether a manager is good enough or all of the members should be added to reflect the ownership in the company.

Regards…Abinder

Answer

The Articles of Organization do not control who can ultimately become a member of your LLC. As long as your Operating Agreement permits it, members can transfer their shares in the LLC among themselves or sell to outside parties to bring more investors into the company.

You will obviously want some writing documenting each member’s ownership and transfers of ownership, which can be done through an amendment or exhibit to your operating agreement.

Some states require that the LLC file reports showing the identity of the current members.

Non-residents can start an LLC in Texas?

by Julio de Melo
(Brazil)

Hi,
I would like to know if a non-resident (a person from another country with no green card or permanent visa) can start a company in Texas (or any other state, for that matter).
Thanks!

Answer

Non-residents can form LLCs in the US, including in Texas.

However, s-corporations (which includes LLCs that choose to be taxed as s-corporations) cannot have any non-citizen as a shareholder.

Is LLC best way to go?

by Gayla
(Texas)

Is an LLC the best way to go for elderly household and education services business or should I go with an S-Corporation or even try for a nonprofit corporation (if we drop the household services and just go with education)?

Answer

A non-profit will have more hoops to jump through than a for-profit LLC or s-corporation. Does your business actually qualify as a non-profit?

As to LLC vs. S-corporation, each has its disadvantages and advantages. There are ways to somewhat lessen self-employment taxes with an S-corporation, though you do not eliminate them entirely–and it comes at the cost of having the IRS second-guess what a “reasonable” wage is to pay yourself.

In addition, there are restrictions on the type of shareholders in an S-corporation (only natural persons who are US citizens), and you cannot have multiple classes of ownership in an S-corporation.

An LLC is extremely flexible, and can, in fact, be taxed as an S-corporation (however, the LLC must comply with all S-corporation rules in order to maintain S-corporation tax status).

Therefore, you need to consider your goals and requirements to determine the best entity for your needs.

Removing myself from an LLC in texas

Hi, I’m part of an LLC in Texas and I want to remove myself. There are 4 members including me. There is no operating agreement outlining how to do this. Everyone is in agreement and the other members want to continue operation of the LLC. how can I remove myself? What forms do I need? and what forms need to be filled in order for the other members of the LLC to continue on?
Thanks!

Answer

You want to withdraw from the LLC.

Unfortunately, Texas law prohibits a member from withdrawing from an LLC (§ 101.107).

However, your written operating agreement can override this prohibition (along with most others, see § 101.052), and permit withdrawal.

Because your LLC does not have a written operating agreement, you cannot withdraw until you have one.

My suggestion would be to draw up a written operating agreement permitting you to withdraw, and have all the members sign it.

Houston, Tx.

by Roger V.
(Houston, Tx., Harris Co.)

can you file for llc in Houston, Tx.? If so, how much is it?

Answer

Forming an LLC is done by state, not by city. So, forming a Texas LLC will be the same cost in Houston as anywhere else in Texas.

As of October, 2009, Texas charges $300 to form an LLC. This is the state fee, and does not include the fees of using a service such as Legalzoom to file the Articles of Organization and other formation documents.

Naive Question

by Mohsen
(Dallas)

Greetings,

I would consider myself a business professional but am somewhat new to the concept of founding my own business which is what I am currently considering. My question is, can I establish my business, run it initially for a limited period of time, before incorporating? this would be in an effort to assess the viability and likelihood of success before investing substantial sums of cash into the incorporation.

Answer

Yes, you can run your business before incorporating.

However, understand that you can be held personally liable for pre-incorporation activities, contracts, etc.

You have to balance the risk and reward according to your own tastes/preferences.

Depending on the type of business you’re running, incorporation expenses could be a large percentage of startup costs.

On the other hand, if you are starting up a business where you’re planning on spending tens or hundreds of thousands getting up and running (such as a franchise), you really ought to incorporate from the beginning.

Quarterly Taxes

I am a brand new SMLLC in Houston, Tx where i work and live, and i am wondering if i have to do a 1040ES next year. I just started so I don’t have anything to go off of.

Answer

You do your 1040ES based on last year’s 1040.

Remember, your 1040ES is based off your personal income tax return.

Your 1040 is the “home base” for all your taxes. The profit and loss from your single member LLC “flows through” to your 1040, and either increases your taxable income (if you made a profit), or decreases it (if you show a loss).

So, if you were employed at a job last year, and made a salary of $X and reported it on your 1040, use those numbers for your 1040ES this year.

Your single member LLC is just another source of potential income for next year (similar to if you planned on taking on a second job next year).

Assuming you pay the minimum amount based on last year’s income, you will not be subject to penalties, if, for example, you make a whole bunch of money next year.

You will of course, have to make up all the difference the following April 15…but you won’t be hit with additional penalties for not making the required estimated payments.

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We Have A Sub-S Corp And A DBA Each With It’s Own FEIN #

We have a sub-s corp and a dba, each with it’s own Fein#. We file one tax return under the sub-s corp name which includes all the activities of the dba. Since we do almost all of our business under the name of the s-corp should we drop the dba fein number or put the dba under the umbrella of the s-corp?

– Carl, Illinois

Answer

I’m not sure why the DBA has a separate FEIN.

The purpose of a DBA is to do business under another name, but without creating a separate legal entity.

DBAs are often used by sole proprietors to operate their business with a trade name rather than their own name. You can also file a DBA to use a trade name for your business other than the legal entity name.

For example, say you had an entity called XYZ Enterprises, Inc. (taxed as an s-corp). The name of your entity doesn’t really describe your business, so you file a DBA to use the name XYZ Lawncare.  XYZ Lawncare wouldn’t have a separate FEIN from XYZ Enterprises, Inc. The DBA allows you to publicly use a more identifiable and brandable name for your business than the name of the legal entity.

I would ask whomever set you up with a DBA under the s-corp why you did so, and if there is no longer a compelling reason for it, I’d stop using it.

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We Have An LLC With 1 EIN And Want To Create A Sister Company

Do we need to create a new corporation? Do we need to create a new ein?

we file as an s- corp and want to gain the benefit overall of the new company that will generate at a loss for a few years.

– Jennifer, Texas

Answer

When you say a “sister corporation”, do you mean that you want an entity that is legally separate from the one you currently have?

In other words, do you want to prevent the liabilities of one company from ‘flowing’ into the other?

If so, and if you want to keep the two companies separate in terms of liabilities, then you’ll need to form separate legal entities, which means forming a new LLC with its own name, EIN, etc.

Otherwise, just have this new “business” operate within your existing LLC.

I notice you anticipate the new business incurring a loss during the startup period.

Here, you’ll want to avoid the c-corporation and stick to partnership or single member LLC (disregarded entity) status to flow those losses through to your personal income tax return and take the deduction.

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What Address Do I Use With An LLC For An Internet Business?

I’m leaning towards creating an LLC and was wondering if I need to use my home address as the LLCs address or can I use a different address like a PO Box from a UPS Store?

Also I plan on naming my LLC different from my 3 websites. I want them to be covered under my LLC, so would I need to file “Doing Business As” – DBAs for each website? And is that done at the secretary of state?

Also since I will be the owner, single member is it necessary to get an EIN? or can I just use my Social Security Number?

– Joe, Michigan

Answer

1. You can use your home address for your LLC’s business address and registered agent address. Understand that the registered agent address is public knowledge. This may or may not be a concern to use. Using an outside service will give you more privacy, but it costs more money.

You cannot use a PO Box as a registered agent address.

2. You don’t need a DBA for each domain name. Make sure that the LLC is listed as the owner of the site, that the LLC pays for the hosting, etc., and that the LLC registers for copyright for the site. In other words, you want it to be clear that the LLC is owner of all the sites. That includes having the LLC open an Adsense account in its own name (if you use Adsense); any affiliate accounts in its own name, Paypal accounts and so on.

3. A separate EIN is a good idea even for single member LLCs, even if not necessarily required because you don’t have employees.

There is no cost to obtain an EIN if you do it yourself by filing a Form SS-4 (you can even fax it or do it over the phone). You’ll be using your EIN to apply for wholesale accounts, paypal, bank accounts, affiliate accounts, etc., and using the EIN instead of your Social Security name gives you a little more privacy.

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What Does An Annual Report For An LLC Look Like?

Do I really have to send in an annual report for my LLC if it hardly makes any money and is a small business? If so, what form does it need to take? Is there an example provided for a small business owner to use as a framework?

Answer

It depends on the state.

Some states require annual reports, many do not.

Each state will have its own format for annual reports.

These are usually not like the “annual reports” that publicly-traded companies issue (e.g. a 10-K), but rather a short form showing the ownership of the LLC, current address, etc.

For example, here are the annual reporting requirements for a Hawaii LLC:

Annual Report: A limited liability company shall file an annual report that lists:

  • The name of the company and the state or country under whose law it is organized
  • The mailing address of the company’s principal office
  • The street address of its registered office in this State
  • The name of its registered agent at its registered office in the State
  • Whether the company is manager-managed, and if so, the name and address of each manager, and the number of members; or if not, the name and address of each member.

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What Is The Annual Fee For An LLC?

Is the annual fee a flat rate or increase as capital increases?

Answer

Depends on which state you’re in. Some states have no annual fee, others charge a flat fee, and still others have a fee that increases with capital up to a maximum.

For example, California has an $800 “franchise tax” that must be paid annually, along with an annual fee based on income earned in California (thanks to the case involving Northwest Energetic Services, LLC v. California Franchise Tax Board, in which the annual fee was held unconstitutional when applied to non-California income).

This California annual fee can go as high as $12,000, for LLCs with incomes of $5 million+.

It sounds like I need to create a summary of annual fees by state along with an explanation of how they operate.

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What Is The Best Way To Start Financing Real Estate?

When would be the best time to form an LLC, after first property? Should I purchase with personal credit then quitclaim to the LLC to start out? Does it help business credit to do this? Any recommendations would be great.

Answer

Even in good markets, for most LLCs, banks are going to require your personal guarantee regardless.

However, having the property in an LLC is good liability protection for you personally for liabilities other than the mortgage debt.

Here’s what I mean. If you own the property in your own name, if someone slips and falls on your property, or if there’s an environmental problem that insurance doesn’t cover (and they don’t cover much–read the “pollution exclusions” in your policy), then you are personally on the hook. Environmental laws are particularly nasty, and the EPA and state agencies don’t care who caused the problem, if you own it, you are liable.

On the other hand, having your property in an LLC will protect you personally from the slip and falls and environmental problems (assuming that you weren’t personally dumping stuff on the property yourself).

In terms of the right order to do things in? Either way will probably work. If you’re interested in building business credit, I would suggest having the LLC take out the loan. Understand that you will have to personally guarantee it, but at least the LLC will be building a credit record, and you will have insulated yourself from all liabilities associated with the property EXCEPT the mortgage note you personally guaranteed.

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What Is The Difference Between Members Vs Managers

When choosing who should run my llc members or managers what are the differences?

Answer

A member is the owner of the LLC. Think of them like shareholders in a corporation.

A “manager” is a person who has the power to make decisions on behalf of the LLC.

In a member-managed LLC, the members (owners), make all the decisions. It’s sort of like running a partnership.

In a manager-managed LLC, a manager (who is not an owner/member), is hired by the owner(s) to manage the day to day operations of the company.

Before the IRS changed the rules to allow LLCs to simply choose whether to be taxed as partnerships or corporations (called “check the box” regulations), whether an LLC was manager or member-managed could impact its tax classification. There was a four part test to determine if the LLC was more like a corporation or a partnership.

This is not an issue anymore, which is good because the old system was complex and confusing.

If the members (owners) of the LLC are going to operate the LLC on a daily basis, the LLC should be member-managed.

If the members are hiring some non-owner to manage the company, then it is a manager-managed LLC and they need to appoint that person as Manager.

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What Tax Forms For An LLC Are Used For Rental Investment Property?

We have a 10 member LLC used for Investments.
We file the 1065, with K-1’s sent out to each member.

This year, 2 members got a Loan, purchased a Rental House as an Investment.

Question
1. What Tax forms do we need to use to figure their portion of the LLC?

2. What Tax Forms would they need to use in their own Personal Tax Returns?

I have really enjoyed your Posts… I hope this one isn’t over the Edge.
Be Blessed Investors,

– Randall, Iowa

Answer

Your multi-member LLC is taxed as a partnership.

Form 1065–which you have already been using–is the proper form for your partnership’s tax returns.

The individual LLC members will use the K-1 they receive to record their income (or loss) on their personal tax returns.

Is this new rental house the member’s purchased part of the LLC, or a side venture outside the 10 member LLC?

If it’s outside the LLC, and they own it in their own name, then it would be recorded on Schedule C. Schedule C is part of your personal 1040 return.

If the investment was inside the LLC, then the members need to decide among themselves how to allocate income, expenses, profits/losses, and distributions.

LLC law is very flexible when it comes to these decisions, which is both good and bad. It’s good because you can pretty much devise any profit sharing scheme you want. It’s bad because you have to make these decisions, and these decisions have tax and other consequences.

When it comes to multi-member LLCs with complicated tax issues involving loans to the LLC, uneven contributions of property from a subset of members, and so forth, there’s one piece of advise to give:

See an attorney.

I know you’d like to get your answer from “some guy on the internet”, but trust me, you don’t 🙂

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When To Start Establishing Business Credit As An LLC?

I want to start purchasing residential rental property, when should start establishing business credit? Can I form an LLC and build credit before I even buy property?

Answer

You can begin establishing business credit as soon as your LLC is created.

Your LLC establishes credit by doing things such as opening business credit cards, obtaining a Dun and Bradstreet number, and taking out loans.

The LLCs establishes GOOD credit by making timely payments on the above.

In terms of purchasing property, it is unlikely that even “good” business credit, if your LLC is small, will ever get a mortgage that is “non-recourse”.

By non-recourse, I mean a mortgage where you won’t have to personally guarantee the note.

In most situations, a lender will require that the owners/officers of the LLC personally guarantee the mortgage.

For example, I’ve worked with companies that have owned commercial real estate for 30 years and the lender still requires personal guarantees from the owners.

With large, well established LLCs (such as a public company), they can get financing without a personal guarantee of an officer.

But for a small real estate investor, the lender will almost certainly require that you guarantee the note.

Where business credit comes in handy is in establishing lines of credit with suppliers and credit cards without a personal guarantee. While a brand new LLC is unlikely to obtain credit without a personal guarantee, over time, with a good payment history to creditors that is reported to Dunn & Bradstreet, your company can establish business credit.

So yes, the sooner your business starts establishing a credit history, the sooner it will be able to obtain credit.

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Where Can I Get A List Of LLC Tax Deduction Items?

Where I can get a list of LLC tax deduction items?

– Henry, California

Answer

Henry, excellent question, that I’m going to have to get back to you on.

The general answer is that you can deduct all “ordinary” and “necessary” expenses related to your business.

However, I know what you’re looking for is a list of specific types of expenses (is advertising “ordinary” and “necessary” — yes, it is).

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses Has a general list of the categories of business expenses that are deductible.

While http://www.irs.gov/publications/p535/index.html is much more comprehensive and in-depth.

With regards to ordinary and necessary business expenses, the next distinction to make is between currently deductible expenses and capital expenses. Deductible expenses are subtracted in their entirety from your company’s revenue to determine taxable income during the year the money was spent (if you’re using cash accounting). Capital expenses can only have part of the cost deducted each year in a process called “depreciation”. The number of years it takes to fully depreciate a capital expense depends on the type of capital purchased (equipment, real estate, etc.) and is determined by IRS rules.

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Dissolve A Florida LLC Without The Other Partner’s Signature

I filed an LLC in Florida. I am the managing member and another person is a member and the registered agent. I no longer wish to have this LLC since I moved and other person has moved. I don’t know where he is. Can I dissolve this or remove my name from the LLC without other person’s signature?

Answer

Without a court order, or a resignation of the other member, I doubt you can dissolve a Florida LLC without all the members’ consent.

You can withdraw (resign as a member) from the LLC, though there might be restrictions based on what’s in your operating agreement.

If you don’t have an operating agreement, then Florida law makes withdrawal more difficult:

Florida Statute 608.427(1) provides the following:

      A member may withdraw from a limited liability company only at the time or upon the occurrence of an event specified in the articles of organization or operating agreement and in accordance with the articles of organization or operating agreement.
    Notwithstanding anything to the contrary under applicable law, unless the articles of organization or operating agreement provides otherwise, a member may not resign from a limited liability company prior to the dissolution and winding up of the limited liability company.

I you think you might be exposed to significant liability, speak with a Florida attorney.

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Writing Cost Estimates And Contracts From An LLC

On the subject of limiting liability to the LLC, I understand that contracts need to by signed by the LLC and not a person (i.e., it is signed by a member of the LLC on behalf of the LLC).

So, if I am writing a cost estimate (that will function as a contract), and and if I will sign it properly by the LLC, can I still use “I” in the letter? (My question is regarding ruining the legal liability protection, not grammar.)

Examples: “I am writing to provide the requested cost estimate…” or “I estimate the work can be completed by Sept 8…”.

Thanks!

– C.D., Colorado

Answer

It’s fairly common for an incorporated business such as a limited liability company or corporation to use pronouns such as “I” or “we” in contracts. As a note, a bid or estimate can be a binding contract if it meets the legal requirements of offer, acceptance, and consideration.

The primary risk with the language in a contract is not that you’ll inadvertently pierce the corporate veil, but rather that you personally will become a party to the contract when you intended for only the LLC to be a party.

Here are a few steps you can take:

1. The letterhead of the contract/bid should clearly state that it is XYZ, LLC entering into the contract, not John Smith.

2. The signature line needs to read something such as:

XZY, LLC

By:______________________(sign here)
Its:_Member of XYZ, LLC__

3. If you want to be very careful, the first paragraph of your contract/bid can read something like:

This contract is made and entered into on this _________ (date), by and between XYZ, LLC, a Colorado limited liability company (“Us” or “We” or “Contractor”) and ________________, (“You” or “Customer”).

Then, make sure you consistently use the terms as you defined them above.

On the flip side, if you are dealing with a limited liability company, but you want to hold the owner’s personally accountable and not just the LLC, then you’ll need to either have them explicitly sign the agreement in their personal capacity or have them sign a separate personal guaranty document.

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Using “LLC” In Your Business Name

A person recently emailed me and asked:

“If I create an LLC, do I have to market my business name with the LLC at the end?”

While this site does not give legal advice, the my answer is a typical “lawyer” answer: it depends.

When you create “Your Business, LLC” that is your business’ legal name.

Some companies don’t put the “LLC” or “Inc.” or “LLP” after every mention of their name–particularly on products.

An “LLC” or “Inc.” makes for an ugly trademark.

Here are a couple of places you absolutely must use your full corporate name (i.e. with LLC or Limited Liability Company at the end):

  • On all contracts (this includes purchase orders, sales contracts, etc.)
  • Employment contracts
  • Joint venture agreements
  • Deeds
  • Other recorded instruments involving real property (e.g. liens)
  • Leases
  • Sales of real property
  • Registrations of copyrights, trademarks and patents

If your business has a trade name, something that it is known for other than your formal LLC name that you registered with the state, you can file a DBA. DBA stands for “Doing Business As“.

Suppose you have been operating a sole proprietorship (i.e. not incorporated) for years as a contractor. Your company was known as “John R. Smith Contractors”. Now, you’ve decided to form an LLC and, decided to give your new LLC the ambitious name of “International Contractors, LLC”.

However, many of your old customers remember you as John R. Smith Contractors. Your truck has John R. Smith Contractors stenciled on it, and your contracts are pre-printed with John R. Smith Contractors, and you don’t want to throw them out.

What you can do is register John R. Smith Contractors as a Doing Business As name of International Contractors, LLC.

Check out Legal Zoom’s inexpensive DBA service. 

Visitor Question:

LLC after business name?

by Shawn
(Hawaii)

1. Do I have to put LLC after my business name?

2. I am an artist, putting together a plan to open my own gallery. Is LLC the best option for me? The research I have done point in this direction.

Answers

1. Yes. Or you can use variations such as “L.L.C.”, “Limited Liability Company”.

In your particular business–an art gallery–there is some considerable risk. For example, contract disputes with artists/buyers, liability for damaged works, a rogue business partner who makes unrealistic promises to buyers/artists, and so on.

All these things can–if you are unincorporated or a general partnership–expose your personal assets to loss.

If you are starting this gallery with a partner, I strongly suggest that you form an LLC, and NOT a general partnership. Otherwise, if the relationship sours, you can be held personally liable for actions of your ex-partner made on behalf of the partnership.

Furthermore, if you are going into business with a partner, you need an Operating Agreement.

Don’t skimp on this!

You can save a couple bucks filing your Articles of Organization yourself. However, you cannot draft your own Operating Agreement (unless you happen to be an experienced business lawyer in addition to your other trade).

Either find yourself a trusted attorney, with experience in LLC Operating Agreements, to draft one for you.

Or, if you form your LLC through Legalzoom, they include a customized Operating Agreement with their formation package.

It’s a very good deal. If you require an attorney’s customization beyond Legalzoom’s Operating Agreement, rest assured that by having a document to start with, you will save a significant amount on the attorney’s revisions.

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