What is a Limited Liability Company LLC?

An LLC is a type of business structure that combines the tax benefits of a partnership with the liability protection of a corporation. In an LLC, owners are referred to as “members” and their personal assets are typically protected from company debts or lawsuits.

The management structure of an LLC can be either member-managed or manager-managed, and profits and losses can be passed through to members and taxed as personal income.

How is an LLC taxed by the IRS?

An LLC, or Limited Liability Company, is a hybrid business structure that combines the features of both corporations and partnerships. As such, the taxation of an LLC is unique and can be confusing to understand.

The Internal Revenue Service (IRS) taxes LLCs differently depending on whether it is a Single Member LLC or a Multi-Member LLC.

Single Member LLCs

Single Member LLCs are taxed by the IRS as a disregarded entity. This means that the LLC income and expenses are reported on the owner’s personal income taxes, along with all other income sources.

The owner pays income tax according to their taxable income bracket, regardless of how much profit their business made that year.

Multi-Member LLCs

Multi-Member LLCs are treated like a partnerships for tax purposes and must file Form 1065 with the IRS each year. Each member then reports their share of profits and losses, which should be set in the LLC operating agreement, on their personal income tax return using Schedule E (Form 1040).

In most cases, this allows them to take advantage of pass-through taxation which allows all net income from the business to be taxed at individual rates rather than being subject to double taxation.

Who has to pay taxes owed by an LLC?

The IRS requires that each member of an LLC pay tax on their respective share of income, regardless of whether or not they are actively involved in the business.

This means that if one person owns a majority share in an LLC, he or she will be liable for a larger portion of the taxes than someone who only holds a small stake in the company.

If the LLC fails to make payments toward its taxes, all members can be held personally liable for the debt.

LLC Tax Benefits

LLCs offer a number of tax benefits that make them a popular choice for small businesses. Below are some key tax benefits of filing as an LLC:

• Pass-Through Taxation: LLCs are taxed as “pass-through entities,” meaning their business income and expenses are reported on the individual member’s personal income tax returns. Since LLC owners don’t pay corporate federal income taxes, this eliminates the need for double taxation and allows for profits to be taxed at individual rates rather than corporate rates.
• Lower Taxes: The pass-through structure also allows LLC members to deduct certain business expenses from their gross income, reducing their overall tax liability. Some states also offer lower or no taxes for certain types of LLCs, such as those operating in multiple states or that qualify as S Corporations.
• Flexible Ownership Structures: LLCs offer flexible ownership options that allow members to decide how they want to divide up profits and losses among themselves without having to worry about complex partnership agreements between all owners. This makes the LLC structure one of the simplest ways to legally operate a business with multiple owners.

How can an LLC minimize its income tax burden?

An LLC can minimize its income tax burden by taking advantage of pass-through taxation, deducting business expenses from its gross income, retaining profits, and planning ahead.

Members may also want to work with an experienced accountant or financial planner to ensure they are taking full advantage of any potential tax breaks that may be available.

Proper planning and understanding of the various tax rules and regulations can help LLCs maximize their profits while keeping their taxes low.

What can an LLC deduct from taxes?

As a business owner, it’s important to understand what expenses you can deduct from your taxes to lower your tax bill.

LLCs have the advantage of flexibility when it comes to taxation and can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation business entity. Here is a list of common tax deductions that apply to LLCs:

• Business-related travel expenses
• Advertising and marketing expenses
• Legal and professional fees
• Rent or lease payments for business property
• Employee salaries and benefits
• Office supplies and equipment
• Vehicle expenses for business use
• Utilities and insurance premiums.

Tax Tips for LLC Owners

Are you an LLC owner? Do you know how to maximize your tax savings? Here are a few tips that can help:

• Review your expenses: Take the time to review all of your business expenses – both personal and business-related. By doing this, you can make sure that all eligible deductions are taken advantage of.
• Set up a retirement plan: Setting up a retirement plan for your LLC can result in great tax savings. Consider setting up a SEP IRA or a Solo 401(k).
• Understand the different laws: Every state has different laws regarding taxes and deductions. Make sure you understand the regulations in your state so that you are not subject to any penalties for non-compliance.

FAQ

Do LLC members pay self-employment taxes?

LLC members do not typically have to pay self-employment tax if they are classified as “members” rather than “employees.”

This is because LLCs are considered pass-through entities for federal tax purposes, meaning income and losses are passed through to the members and taxed at the individual level.

LLC members can opt to be taxed as C corporations, in which case they may be subject to corporate taxes and thus have to pay self-employment taxes.

Do LLCs pay state taxes?

LLCs are subject to state income tax, just like any other business. Depending on the state, LLCs may have to pay corporate income tax, franchise tax, sales and use tax, or other separate LLC tax.

LLCs typically must also register with their state and local government agencies, which may come with additional fees.

Do LLCs owe payroll taxes?

Yes, LLCs owe payroll taxes if they have employees. These taxes include federal income tax withholding, Social Security and Medicare taxes (also known as FICA taxes), and federal unemployment tax (FUTA).

LLCs are responsible for both the employer and employee portion of payroll taxes and must remit them to the appropriate tax agencies.

How does an LLC affect personal taxes?

LLCs provide their members with flexible taxation options which can impact their personal taxes differently. LLCs may opt to be taxed as either a sole proprietor, partnership, or corporation for federal income tax purposes, each of which has different rules regarding how and when taxes are paid.

LLC members do not generally pay federal income tax on company profits since they are usually subject to “pass-through taxation.” This means that the profits of an LLC will pass through to its members who then report the income on their personal tax returns.

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This article, "LLC Taxes: Everything You Need to Know in 2024" was first published on Small Business Trends

Is a Limited Liability Company the right choice for your business? Let’s explore the business structure – its pros and cons – so you can decide.

What is an LLC, and How does it Work?

With the limited liability company structure, there can be one owner, two owners (a partnership), or many members. Similarly, what is an LLC operating agreement?

There are choices in the management structure. All the members can have a role in management by having voting rights. The voting rights can be “weighted” or have more clout according to the percentage of ownership the member has in the company.

Memberships in an Limited Liability Company are transferable. Members share in profit and losses; if it’s a partnership, the partners share in profit and losses.

The owners can choose whether or not to be taxed as a partnership or an S Corp, whichever will be more beneficial.

All these types of decisions are spelled out in two key documents: articles of organization and operating agreement. The articles of organization name who is who, and what their roles are. The operating agreement details the business structure, steps for transferring memberships, and how the Limited Liability Company will be managed.

Should I Start an LLC?

There are two main reasons for forming a limited liability company:

1. To protect the owners or members personal assets from liability if the business fails and

2. To realize tax advantages.

For more information read reasons to start an LLC and what type of businesses should be one, for example, small business LLC.

What are the Benefits of having an LLC?

There are many benefits to forming a limited liability company, which also begs the question what can you do with an LLC? That doesn’t mean an LLC is the best choice for every business. There can be as many cons to match the pros – see Pros and Cons of an LLC.

Here is a list of the benefits:

Limited Liability Protection: Personal assets of owners and members protected.

Taxation Choices: Tax impacts can be passed through to owners or members as income on an individual’s tax return (pass-through taxation), or the Limited Liability Company can be taxed as a C Corp or S Corp.

Transferability of Membership: This can be quite simple as spelled out in the operating agreement.

Management Flexibility: The Limited Liability Company can have one manager who is a member of the LLC, or the Limited Liability Company can hire a manager who is not a member. The Limited Liability Company can be run by a committee.

Profit and Loss Pass-through: The Limited Liability Company profit and loss can be passed through to individual members (pass-through taxation), and adjusted to reflect the percentage of ownership.

Members can have voting rights.

Silent Memberships: When the Limited Liability Company is formed, the members don’t have to be listed on the documents.

Taxation: Forming a Limited Liability Company can be a way to avoid double taxation. If a business is a corporation, the business itself may be taxed, and the owners may also be taxed on profits.

What are the Downsides to a Limited Liability Company?

One of the main downsides of forming an Limited Liability Company is that the annual renewal fees can be high. The fees vary by state. Also, there are publication requirements – also vary by state – which must be met for the Limited Liability Company to remain in operation.

To learn more read the Pros and Cons of an LLC.

There are additional downsides.

It may be difficult to raise capital when the Limited Liability Company is being formed.

Although it’s easy to transfer memberships, it can be difficult to transfer ownership.

Profits are taxed immediately. There’s not an option to instead reinvest profits, as you can with a corporation.

Some states restrict certain types of businesses from forming an Limited Liability Company.

Where Should I Form a Limited Liability Company?

You form a Limited Liability Company with your secretary of state. The filing fee may vary from $40 to $500 depending on where you live. Filing requirements may vary according to state law.

Before you file, you’ll need to name your Limited Liability Company, and also write your articles of organization and operating agreement.

What are the Different Types of LLCs?

There are many different types.

• Single Member LLC: This is like a sole proprietorship with benefits. The sole proprietorship doesn’t protect its owner from liability, but the single-member Limited Liability Company does.
• Member Managed LLC: profits and losses go to members (pass-through taxation), and members run the company. The LLC is a type of multi-member LLCs.
• Family Limited Partnership LLC: The Limited Liability Company is owned by family members as in multi-member LLCs.
• Professional LLC: The Limited Liability Company is managed by a manager.
• Restricted LLC: This type of Limited Liability Company only exists in Nevada. The LLC cannot distribute profits until it’s been in operation for 10 years.
• L3C Company: The Limited Liability Company is for-profit but with the philanthropic distribution of profits.
• Anonymous LLC: This type of Limited Liability Company only exists in New Mexico. The ownership details are not on any documents.
• Non-Profit LLC: The Limited Liability Company is a nonprofit with 501c3 status.
• Series LLC: The series Limited Liability Company is available in 8 states. A series LLC is organized by internal segments, such as members, managers, assets, and interests. Profits are shared by members.
• General Partnership LLC – The Limited Liability Company is a multiple-member LLC.
• Limited Partnership LLC – There are at least two members, one is a general partner and one is a limited partner. Usually, the limited partner is a silent partner.

Types of Limited Liability Company Summary

What Type of Business Entity Could I Form Instead of an LLC?

You can form a partnership for a business that isn’t an LLC, or you could form a corporation – a c corporation or an s corporation. Here’s a look at how each type of business entity is different from a Limited Liability Company, and from each other. In each, the ownership structure is different.

Partnership: As with an Limited Liability Company, you can have a general, limited or limited liability partnership. With a limited partnership, the partners report to a general partner. In a general partnership, all owners are equally responsible for debts and profits. The limited liability partnership protects personal assets. So why do an Limited Liability Company instead? The paperwork is easier.

S Corporations: The S Corporation issues stock and owners are shareholders. An S corporation also provides liability protection for owners. S Corporation owners are taxed based on the number of shares they own. The S Corporation owners must report earnings on their personal income tax returns.

If you are asking should I elect S Corp status for my LLC, it is always an option as your business continues to grow.

C Corporations: The C Corporation is an incorporated business that is taxed separately from its owners, who are also taxed. The C-Corporation also provides liability protection for owners. Employees of C Corporations have stock options and benefits. Business owners may choose limited liability companies for tax purposes instead of C Corporations to avoid double taxation of their company.

How to Form a Limited Liability Company (LLC)

Limited Liability Companies must be filed with the secretary of state where the companies are formed.

You’ll need to have developed your articles of organization, which include the names of all members and management, your company name and address, and the name and address of your registered agent.

You’ll need to have also developed your operating agreement, which establishes the rules and bylaws of the company. The operating agreement also includes the details of the company management and the business plan for company operations.

For more information on these topics go to How do you Create an LLC.

After you’ve formed and done the filing for your LLC business entity, you’ll have some additional steps to take: Check out 10 Things You Need To Do After Forming An LLC.

Roles and Responsibilities in an LLC

Just like corporations, Limited Liability Companyies can also define roles and responsibilities for their members. While not mandatory, it’s a good practice, especially as the LLC grows:

• Operating Agreement: It’s crucial for an Limited Liability Company to draft an operating agreement. This document outlines the operational procedures of the business and the roles and responsibilities of each member. It can be seen as the rulebook of the company.
• Decision-making Process: In a Limited Liability Company, decisions can be made collectively or might require unanimous approval, depending on the operating agreement. Important decisions, like bringing in a new member or taking on significant debt, should have clear voting processes.
• Duties and Responsibilities: Each member may have specific duties and responsibilities, such as managing financials, overseeing marketing, or handling day-to-day operations. It’s crucial to clarify these roles to avoid overlaps or gaps.

Management and Business Structure of an LLC

Corporations have structured management and business structures. For example, there are meetings of boards of directors of corporations, and the content of the corporation meetings must be noted in writing and recorded.

Limited Liability Company structures are generally not as strict as they are with corporations. That’s because the owners or members who establish the LLC set the guidelines for the Limited Liability Company companies. That’s not to say that an Limited Liability Company can’t have a board of directors, similar to a corporation setup.

There are two main types of LLC business structures. With either structure, the members can decide to have a board of directors. Members will have voting rights based on their amount of capital investment in the company.

Member managed

Typically this type of LLC structure has a small number of members. Usually, each member has the experience and wants an active role. This is a good choice for small businesses.

Manager managed

In this LLC structure, one person is chosen as manager. The person chosen as a manager can be a member or non-member. Members can replace the manager and that is typically done by vote.

Limited Liability Company Taxation and Financial Management

Navigating the complexities of LLC taxation and financial management is essential for ensuring the financial health and sustainability of your business. Here are key points to consider:

• Flexible Taxation: Unlike corporations, LLCs benefit from pass-through taxation, allowing profits and losses to be reported on members’ personal tax returns. However, an LLC can choose corporate taxation if it offers financial advantages.
• Financial Management Essentials:
  • Meticulous Bookkeeping: Keep detailed records of all business transactions.
  • Separation of Finances: Ensure a clear distinction between personal and business finances to maintain the integrity of your LLC’s financial management.
  • Tax Planning: Engage in proactive tax planning, including making estimated tax payments quarterly and understanding state-specific tax obligations.
  • Expense Deductions: Maximize tax deductions by accurately tracking and deducting eligible business expenses.
• Professional Advice: Consulting with financial advisors or accountants familiar with LLC structures can offer strategies for asset protection, profit maximization, and efficient tax planning.

Succession Planning and Future Proofing Your Limited Liability Company

Ensuring the longevity and legacy of your LLC involves thoughtful succession planning and strategies to adapt to future challenges. Here’s how to approach it:

• Succession Planning:
  • Operating Agreement Provisions: Include clear protocols in the operating agreement for the transfer of membership interests and decision-making in the event of a member’s departure.
  • Leadership Development: Identify and develop potential future leaders within the organization to ensure a smooth transition.
• Future-Proofing Strategies:
  • Technological Investment: Stay ahead by investing in technology that improves efficiency, diversifies product offerings, and enhances customer engagement.
  • Organizational Culture: Foster a culture that values innovation, flexibility, and continuous learning to empower your team to navigate future challenges.
  • Legal Safeguards: Regularly review your operating agreement, compliance practices, and insurance coverage to protect against future legal challenges.
  • Market Trends and Regulatory Changes: Keep abreast of technological advancements, regulatory changes, and market trends that could impact your business.

How Much Does it Cost to Form an LLC?

Depending on the cost from state to state, the cost to file can vary from $40 to $500. Limited Liability Companies are filed with the secretary of state.

You’ll incur additional costs of course if you elect to hire a lawyer and/or accountant. You may need an accountant to advise you of the tax implications of the various types of LLCs and corporations setups.

How are LLCs taxed?

All Limited Liability Companies provide asset protection and all are taxed. The tax classification depends on the structure of the LLCs:

If there is only one member the LLCs are taxed as a sole proprietorship. In tax lingo, the single-member LLCs are called “disregarded entities” and profits and losses are reported on Schedule C of tax returns.

If there are two members, the LLCs are taxed as partnerships.

Multi-member Limited Liability Companies are taxed as partnerships. The members must report LLC profits and losses using two forms, 1065 for overall figures and Schedule K-1 for individual figures.

A C-Corporation is taxed as a business. C-corporation owners also report income on personal taxes. Company debts and profits must be reported. This is double taxation.

For an S corporation, owners are shareholders. The owners report their share of the income on Schedule K-1.

Should I Change my Sole Proprietorship to an LLC?

The main reason to join the ranks of limited liability companies would be to protect personal assets.

If you are a sole proprietor, you may be able to enjoy a low-income tax rate. However, you are also liable for business debts. If you have business debts as a sole proprietor, creditors may be able to go after your personal property.

Want more in-depth information? Go to How to Change Your Sole Proprietorship to LLC: 6 Easy Steps.

How do LLC owners get paid?

LLC owners get paid by their share of the profit. The owners or members are paid via a distribution that passes from the LLCs to them. They must report the income from LLCs on their personal income tax return that they file.

If the Limited Liability Company is an S corp, the company issues stocks and the owners are taxed based on the shares that they own.

If the Limited Liability Company is a C Corp, the owners are taxed based on their earnings with the company.

What is a registered agent?

A registered agent is a person appointed by the leaders of the Limited Liability Company. The registered agent accepts legal documents on behalf of the business. To fulfill that role, the person must be available during business hours.

The registered agent must be filed with the state when the Limited Liability Company information is filed. The person must be registered in the state as a registered agent, and be a resident of the state.

What is an LLC operating agreement?

The LLCs operating agreement spells out the roles of the owners, manager, and members. The agreements also include the bylaws of the Limited Liability Companies, and management and operations details of the LLCs.

How do you prepare an operating agreement? For more info, go to Does Your LLC Need an Operating Agreement?. To learn more about what should be included, check if amending an LLC operating agreement is the right step for you.

Do I need a lawyer to form an LLC?

That depends on how complicated your Limited Liability Company is. Is it a single owner? You can probably walk yourself through it.

If you’re going to have a complicated operating agreement or a multi-member LLC, it may be best to retain a lawyer. Some of the paperwork – especially the annual refiling and reporting – can be daunting and it must be completed in a timely manner. Miss a deadline? You’ll have to file all over again.

And why shouldn’t business owners be free to concentrate on building the business? You can put all your legal matters into the hands of an attorney who’s well-versed in limited liability companies. There are lawyers who specialize in this LLC limited liability field.

Your lawyer may also be able to give you guidance as to which type of Limited Liability Company is best for your business.

Should I form a partnership or an LLC?

Both a partnership and an LLC business provide limited liability protection.

A general partnership as a business operates under the names of the owners, as a joint venture. The owners share in profit and loss – and owners are personally liable for business debts.

What does an LLC protect your business from?

An Limited Liability Company protects you from:

1. Seizure of your personal assets. In other words, if your LLC business fails, creditors can’t put a lien on your house, or personal bank account or possessions.
2. Double taxation. You’ll pay income tax on any profits the LLC makes (or on your share of the profits). You’ll report that income or loss on your personal income tax on Schedule C.
3. Being named as involved in a business as an LLC member. LLCs don’t have to list the names of all their members on documents filed for the business.

Do I need an EIN number for an LLC?

Yes, if you’re a single-member LLC. In other words, if you’ve turned a sole proprietorship into a single-member LLC.

Image: Depositphotos

This article, "What is an LLC?" was first published on Small Business Trends

This type of business has very few start-up costs and operational hurdles. If that sounds appealing, then let’s dive into what it means to become a sole proprietor.

What is a Sole Proprietor?

A sole proprietor is an individual who owns an unincorporated business that is not registered as a corporation or limited liability company. It is the simplest form of business structure, and one person serves as both the owner and the operator of the business.

A sole proprietor has complete control over all aspects of their business, such as decision-making and profit distribution, and is responsible for any debts or legal action taken against the business.

An Example of a Sole Proprietorship

John, a freelance web developer, operates from his home office. Unlike forming an LLC or corporation, he has chosen to run his business as a sole proprietor, handling taxes on his business income under this structure.

He enjoys complete autonomy over his business decisions. This includes setting his service fees, selecting projects, and strategizing his marketing approach. However, this independence also brings legal responsibilities, making him personally accountable for any debts or legal actions his business may encounter.

Successful Solopreneurs and Their Ventures

Solo entrepreneurship success stories are rife with inspiring success stories. As such, many solopreneurs have turned unique ideas into profitable enterprises and have navigated the challenges of running a business single-handedly. They often showcase innovation, resilience and strategic acumen.

Here’s a closer look at some of these remarkable individuals and their entrepreneurial endeavors:

• Sara Blakely: Sara Blakely, the founder of Spanx, transformed her unique idea of seamless pantyhose into a globally recognized brand. Starting from scratch, she grew Spanx into a fashion empire with a valuation of $1.2 billion, proving the immense potential of a solopreneur’s vision combined with unwavering determination.
• Pierre Omidyar: Pierre Omidyar’s journey from experimenting with online sales of PEZ dispensers to creating eBay, a $35 billion eCommerce giant, epitomizes the transformative impact of digital innovation in entrepreneurship. His story underscores the power of a solopreneur’s idea to revolutionize an industry.
• Andrew Carnegie: Andrew Carnegie’s rise from humble beginnings to establishing one of America’s largest steel manufacturing companies exemplifies the quintessential solopreneur spirit. His success story is a testament to how hard work, vision, and perseverance can lead to extraordinary achievements in business.

Advantages of a Sole Proprietorship Business Structure

Sole proprietorships offer many benefits to those considering starting their own business. Here are five advantages of a sole proprietorship:

• Low startup costs. Becoming a sole proprietor has low start-up costs as there are very few legal and administrative fees associated with setting up the business.
• Flexibility. As a sole proprietor, you have complete control over your business and can make decisions quickly without having to consult with a board of directors or other partners.
• Tax treatment. Sole proprietors are only taxed on the profits they generate and may be able to include some of their business expenses as tax deductions, such as mileage or office supplies.
• Simplicity. As a sole proprietor, there is less paperwork that needs to be filed with the state in order to get up and running.
• Privacy. As a sole proprietor, your business is not registered with the state and therefore any financial information associated with it is private.

Disadvantages of a Sole Proprietorship Business Structure

While there are many advantages to being a sole proprietor, it also comes with many drawbacks. Here are four disadvantages of a sole proprietorship:

• Personal assets are at risk. The business is not separate from the owner. So if you accumulate business debts or face any business legal action, you are personally responsible and your assets may be at risk.
• Self-employment taxes. Sole proprietors are responsible for their own taxes and must pay self-employment taxes as well.
• Limited access to capital. As a sole proprietor, you are limited to the amount of money you can raise through personal investments and/or loans.
• Lack of continuity. If something happens to the owner, such as death or disability, the business may be forced to close as there is no one else to take over.

How to Start a Sole Proprietorship

Learning how to start a business as a sole proprietor is relatively simple. In addition to checking out our business startup checklist, follow these steps to get your sole proprietorship up and running:

Step 1: Choose a business name.

When starting a business, you must choose a name that is not used by another registered business. Check the Secretary of State’s website or the local county clerk’s office to make sure the name you want is available.

Step 2: Obtain any necessary permits, licenses, and tax IDs.

Depending on your business and the state where you are located, you may need to obtain a permit or license in order to legally operate. In addition, all businesses must obtain a Federal Tax ID (EIN).

Step 3: Open a business bank account.

Having a separate bank account for your business allows you to keep your personal and business finances separate.

Step 4: Consider purchasing business insurance.

Although it’s not required, having business insurance can provide protection for your business in case of accidents or lawsuits.

How do you File Taxes as a Sole Proprietor?

Anyone who owns their own business and operates as a sole proprietor must treat business income like any other income they have earned. Generally speaking, business income earned by a sole proprietor should be reported on their personal tax return and is subject to normal business taxes.

Taking advantage of business tax deductions can help decrease your business income and your total overall tax bill.

What taxes do sole proprietors pay?

The taxes that sole proprietors must pay can vary, depending on the type of business they own and where it’s located. In general, sole proprietors must pay the following taxes:

• Self-Employment Tax: The self-employment tax is a significant financial consideration for sole proprietors. It is comprised of Social Security and Medicare taxes, which are usually withheld from employees’ paychecks by employers. However, as a sole proprietor, you are both the employer and the employee, so you are responsible for paying both portions of these taxes. As of my last update in September 2021, the self-employment tax rate was 15.3% of your net business income, up to a certain income threshold. It’s essential to check for any updates to these rates as tax laws can change over time.
• Personal Income Tax: One of the main advantages of a sole proprietorship is that the business’s income is considered the owner’s personal income. This means that you must report your business income and expenses on your personal income tax return. The tax rate you pay will depend on your total taxable income, which includes both your business earnings and any other sources of personal income. Be sure to keep accurate records of your business expenses to maximize deductions and reduce your overall tax liability.

They also pay:

• State and Local Taxes: Apart from federal taxes, sole proprietors may also be subject to state income taxes and other local business taxes, depending on the regulations in the state and locality where the business operates. Each state has its own tax laws, so it’s crucial to understand the tax requirements in your specific location to ensure compliance and avoid potential penalties.
• Sales Tax: If your sole proprietorship involves selling goods or certain services, you may be required to collect and remit sales tax on behalf of your customers. Sales tax requirements vary widely by state, and sometimes even by local jurisdictions, so it’s essential to determine whether your products or services are taxable and at what rate. Failure to collect and remit sales tax properly can lead to audits and financial penalties.
• Property Tax: As a sole proprietor, you may own business property, such as real estate, equipment, or vehicles, which may be subject to property taxes. Local authorities determine property tax rates and can vary based on the value and type of property you own for business use.

Navigating the complex world of taxes as a sole proprietor can be daunting, but it’s crucial to stay informed about your tax obligations and take advantage of any available deductions to optimize your tax situation. Consider seeking the advice of a qualified tax professional to ensure proper tax planning and compliance, allowing you to focus on growing your business with confidence.

Sole Proprietorship Vs. LLC

When discussing a sole proprietor vs LLC, there are several differences to consider before deciding which type of business structure is best for you. Let’s have a look…

https://docs.google.com/spreadsheets/d/1ErgjHWvq1rdrSAnXnZo4Za3yZfo70VcFz7Dee4tHSvY/edit?usp=sharing

Sole Proprietor Vs. Owner

As shown below, there are many similarities and only a couple of differences between a sole proprietor and an individual owner who has not registered their company as an LLC or corporation.

https://docs.google.com/spreadsheets/d/1ErgjHWvq1rdrSAnXnZo4Za3yZfo70VcFz7Dee4tHSvY/edit?usp=sharing

Moving from a Sole Proprietor to a Limited Liability Company (LLC)

For small business owners, making the move from sole proprietor to LLC is a key milestone in the life of their business. Creating a business entity to operate under provides owners with greater personal liability protection and tax advantages.

To make this move, you’ll need to register your business with the state, create an operating agreement, obtain any necessary permits and licenses, and transfer any existing business assets.

Is a Sole Proprietorship right for you?

Have you ever thought of starting your own solopreneur business? A sole proprietorship could be the right option for you. There are so many solopreneur business ideas out there from web design to freelance writing, and as a solopreneur, you have the creative freedom to pursue your passions without relying on anyone else’s opinion.

A sole proprietorship could be for you if you’re looking to start a business with minimal cost and paperwork, while still having some degree of personal liability protection.

Is sole proprietor the same as self-employed?

No, a sole proprietorship and self-employed are not the same thing. A sole proprietor is an individual who owns and operates a business without any formal organization.

A self-employed individual is someone who works for themselves and receives income from their business activities but doesn’t necessarily own a business. While a sole proprietor must register their business with the state, self-employed individuals do not need to do this.

Do sole proprietors pay income tax?

Yes, sole proprietors must pay income taxes on any business profits they make. They should also report any self-employment income on their personal tax return.

In addition to income taxes, sole proprietors may also need to pay other taxes such as sales tax, property tax, and self-employment tax. You should actively research the various taxes applicable to your business to ensure proper payment

Can I pay myself a salary as a sole proprietor?

Learning how to pay yourself as a business owner is an important factor to consider when setting up a business as a sole proprietor.

While business owners cannot pay themselves an employee salary, they can pay themselves distributions from their business profits as long draws or dividends. The amount of these payments can vary, depending on the business’s financial situation and the owner’s personal needs.

Image: Depositphotos

This article, "What is a Sole Proprietor?" was first published on Small Business Trends

In today’s interconnected world, determining when to register your business in another state has become a pressing concern, given how geographical boundaries seem almost nonexistent in the digital landscape.

The surge of online platforms means small business owners are frequently collaborating with virtual teams, forming distant partnerships, and entering into agreements with clients they’ve never met face-to-face.

Amidst this web of global interactions, discerning the boundaries of business operations becomes a challenge.

Could there be inadvertent breaches of state regulations due to a lack of proper registration? Allow us to dissect this intricate landscape, offering clarity on the nuances of out-of-state business registrations.

When to Foreign Qualify Your Business in Another State

Navigating the intricacies of registering a business in another state can be complex. The decision hinges on various factors, primarily centered around the nature and extent of your business activities in the new state. Here are key considerations to help you determine when to undertake this crucial step:

• Physical Presence: If your LLC or corporation has an office, retail store, or other physical presence in another state, you may need to register there.
• Frequent In-Person Meetings: Regular, face-to-face interactions with clients in a particular state can necessitate registration.
• Revenue Source: If a significant portion of your company’s revenue is derived from activities in another state, consider foreign qualification.
• Employee Presence: Employing workers in another state and paying state payroll taxes is a strong indicator for registration requirements.

State Business Licenses: If you have obtained a business license in another state, it’s a clear sign of conducting business there, necessitating registration.

Examples of When to Register

• Expanding a physical business like a restaurant across state lines.
• Operating in one state while being physically located in another.
• A business partner in another state contributing significantly to client acquisition.

Freelancers and Online Businesses

For businesses like freelancing where work is predominantly online and clients are nationwide, physical location-based registration may not be necessary.

Remember, consulting with a legal or financial advisor can provide personalized advice tailored to your specific business circumstances.

Process for Foreign Qualification

• Submitting an application to the Secretary of State’s office in the state you wish to operate.
• Some states require a Certificate of Authority or Statement & Designation by a Foreign Corporation.
• Providing a certificate of good standing from your home state might be necessary.

Legal and Financial Implications

• Foreign qualification helps avoid fines, interest on unpaid taxes, and legal limitations like the inability to file lawsuits in the state.
• Ensuring legal compliance is crucial for smooth business operations and avoiding unforeseen challenges.

Foreign Qualification: Business in Another State

“Doing Business” in Another State

Consider this – if your enterprise forays into territories outside the state of its incorporation or where you’ve established an LLC, it’s essential to get it registered in these new jurisdictions.

A term you’ll frequently encounter in this context is “foreign qualification.” Pondering over the phrase “conducting business,” let’s frame it with an example: suppose a client from Oklahoma acquires your product, but your operational base is in Nevada.

Does this single transaction translate to you conducting business in Oklahoma?

To shed light on such intricacies, in this situation, you’re not technically operating within Oklahoma’s borders.

Questions to ask to see if you need to file a foreign qualification for a state:

• Does your LLC or corporation have a physical presence in the state (i.e. office, restaurant, or retail store)?
• Do you often conduct in-person meetings with clients in the state?
• Does a significant portion of your company’s revenue come from the state?
• Do any of your employees work in the state? Do you pay state payroll taxes?
• Did you apply for a business license in the state?

If you answered yes to any of these, your business may need to file a foreign qualification in that state.

Examples of Foreign Qualifications

Here are some examples of common situations when you need to foreign qualify and when you don’t.

• Let’s say you operate a restaurant in North Carolina and want to expand into South Carolina. You’ll need to file a foreign qualification in South Carolina.
• You incorporated your business in Nevada, but you are physically located in California. You need to foreign qualify in California.
• You live in Massachusetts and your business partner lives in California. The company is incorporated in Massachusetts, but lately your partner has been bringing in the bulk of your company’s clients and meeting with them in California. You need to foreign qualify the business in California.
• You are a freelancer who formed an LLC for your business in Florida. You perform the majority of your work online, and have clients all over the country. In this case, you don’t need to file a foreign qualification, since you’re not frequently physically meeting in another state. Just because you are bringing in revenue from customers in other states doesn’t mean you are transacting business there according to the law.

If you have any questions about whether or not your business needs to foreign qualify, you should check with your attorney or accountant.

How to Foreign Qualify

When looking to extend your business activities beyond your home state, it’s imperative to be aware of the necessary procedures. This involves submitting an application, typically to the Secretary of State’s office in the state you’re targeting.

The document might be termed a Certificate of Authority or, in some cases, the Statement & Designation by a Foreign Corporation.

If navigating this seems daunting, there’s no need for concern. You have the option to liaise directly with the Secretary of State’s office or engage the expertise of the agency that assisted in your initial business setup. They’re well-equipped to guide you through.

Engaging in inter-state business isn’t just about paperwork; it’s about ensuring you’re in good standing with every state involved.

It’s crucial to recognize that, while the registration process might seem straightforward, there are nuances to consider.

Several states will ask you to provide a certificate of good standing from the state where your LLC or corporation was initially registered.

Essentially, this verifies that you’ve been diligent with your taxes and have complied with all required filings in your home state.

The Bottom Line

Being legally bound to foreign qualify isn’t a light matter. Abiding by the regulations safeguards your business from potentially hefty fines, accrued interest, and the daunting task of settling back taxes for periods you operated unregistered.

Beyond the financial implications, there’s a legal dimension to consider. If your business isn’t registered, you can’t legally initiate lawsuits in that state—a right you’d certainly want to retain.

Prioritizing this legal step is more than just compliance; it’s about fortifying your business’s future against unforeseen challenges and potential setbacks.

To help you quickly gauge whether you might need to foreign qualify in another state, refer to the comparison table below which summarizes the key criteria discussed in this article:

Criteria	Description	Do I Need to Foreign Qualify?
Physical Presence	Having an office, restaurant, retail store, or other physical establishment in another state.	Yes
In-Person Meetings	Frequently conducting face-to-face meetings with clients or partners in another state.	Yes
Revenue	A significant portion of the company’s revenue comes from that state.	Yes
Employees	If you have employees working in the state and you pay state payroll taxes.	Yes
Business License	Applied for or have a business license in the state.	Yes
Online Business	Conducting business primarily online with clients from various states, without frequent physical interactions.	No
Single Transaction	An isolated transaction like a sale to a customer in another state without other physical business operations there.	No

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This article, "When Do I Need to Register My Business In Another State?" was first published on Small Business Trends

CorpNet offers business formations, filings, state tax registrations, and corporate compliance services in all 50 states. Express and 24 hour rush filing services available upon request. Click here to learn more.

The question whether to form an LLC or LLP doesn’t have to be complicated once you understand how these two entities are created, who can create them, and what legal protections and tax benefits they offer.

First, let’s start with the basics. An LLC is a Limited Liability Company. It’s a separate legal entity that protects owners from liability found with the company (similar to a corporation), while also offering the pass-through tax benefits of a sole proprietorship or partnership. The LLC is free of much of the legal requirements and red tape that govern corporations, such as director meetings, shareholder requirements, etc.

The LLP (Limited Liability Partnership) is a general partnership whose partners enjoy some level of protection from personal liability. Similar to the LLC, the LLP is a hybrid of both the corporation and partnership, to give the greatest advantages for taxation and liability protection. The LLP is not a separate entity for income tax purposes and profits and losses are passed through to the partners.

What is an LLC?

An LLC, or Limited Liability Company, is a flexible form of business entity that combines the limited liability protection of a corporation with the simplicity and tax advantages of a partnership. Owners of an LLC are referred to as “members” and the LLC can be owned by individuals, other LLCs, corporations, or even foreign entities.

Unlike shareholders in a corporation, members of an LLC are generally not personally liable for the company’s debts or liabilities. This means that personal assets of the members are usually shielded from business creditors.

What is an LLP?

LLP, or Limited Liability Partnership, is a type of partnership where all partners have limited liability protection. This means that they are protected from the debts and liabilities of the partnership and also from the actions of other partners, to a certain extent.

LLPs are commonly used by professionals such as lawyers, accountants, and architects, where each partner can protect their personal assets from potential negligence or malpractice claims arising from the actions of another partner.

Legal Structure Difference: LLC and LLP

Which is better: the LLC or LLP? To determine what’s better for your company, let’s explore the differences:

State Laws

Before we dive into the differences, it’s critical to understand that laws concerning LLPs vary widely state by state. Generally speaking, LLCs can be formed by any business, persons, or person, while LLPs may be restricted to licensed professionals, such as attorneys, doctors, engineers, architects, and accountants. For example, in California and Nevada, licensed professionals can form an LLP, but cannot form an LLC. This is why a large law firm will opt to form an LLP, as they can operate as an LLP in every state, but would not be able to operate as an LLC in every state.

You’ll need to check with your state’s secretary of state office to determine the specific rules for your state.

Legal Protection

Both the LLC and LLP provide personal asset protection, but there can be crucial differences. For example:

• Members of an LLC are protected from any debt or liabilities of the business. However, members of an LLC are not protected from the liability of another member. If someone in an LLC makes a client error that is legally actionable, then the LLC and all its members can be held liable.
• By contrast, partners in an LLP can be protected from the liability of another member. A partner in an LLP is personally liable only for his or her own negligence (or of someone working under their direct supervision). This is different from a general partnership where each partner is liable for the debts and obligations of the business, as well as the malpractice of other partners.
• In some states, a partner in an LLP can still be personally liable for a variety of partnership debts, such as obligations owned to lenders and creditors.  However, some states regulate that partners are not personally liable for such debts and obligations.

Tax Implications

In general, both LLCs and LLPs do not require the business to pay income taxes on its profits; rather any profit or loss of the business is passed through to the members (LLC) or partners (LLP).

By comparison, a corporation pays income taxes on its business earnings and then if those earnings are distributed to owners, the owners must pay taxes on them again in their personal tax return.

A single-member LLC is considered a sole proprietorship and the member must pay self-employment taxes. It’s important to note that while most LLCs opt for pass-through tax treatment, some may choose to be taxed as a Corporation.

LLPs are treated strictly as partnerships and profits are passed through to the partners.

Management Structure

The way each business structure is managed can differ significantly. While LLCs offer an advantage with their flexible management structure — members themselves can manage it or they can appoint external managers — LLPs usually see all partners managing the firm, unless an alternative agreement has been arranged.

Decision Making

Understanding the decision-making process is pivotal in any business structure, as it can dictate the flow and pace of operations, growth strategies, and day-to-day tasks. Both LLCs and LLPs have unique characteristics when it comes to how decisions are made:

• LLCs:
  • Operating Agreement: This crucial document usually outlines the decision-making process in detail. It can specify who makes decisions, when they are made, and how members’ opinions are weighed.
  • Majority Ownership: Often, those who hold the majority stake in an LLC have a louder voice. This can lead to decisions being driven by a majority vote, although this isn’t always the case.
  • Unanimous Decisions: For some critical choices, like amending the operating agreement or adding a new member, many LLCs require a unanimous decision.
  • Managers: If the LLC chooses a manager-managed structure, day-to-day decisions might be made by designated managers, whereas significant decisions still lie with members.
• LLPs:
  • Equal Say: Typically, every partner in an LLP has an equal voice, which fosters a collaborative decision-making environment.
  • Partnership Agreement: This is the LLP’s equivalent to the operating agreement for LLCs. It can lay out exceptions to the equal-say rule or delineate how conflicts in decision-making are resolved.
  • Veto Power: Some partnership agreements might grant certain partners the power to veto decisions, especially in areas of their expertise or concern.
  • Committee Decisions: Larger LLPs may form committees for specific sectors or decisions. For example, a committee might oversee hiring, while another handles partnerships or expansions.

Start-Up Costs

The decision to form an LLC or an LLP is not only about understanding the operational distinctions but also about estimating initial costs. State laws greatly influence these costs. Setting up an LLC typically involves a filing fee for the Articles of Organization, which can range from $50 to $500 depending on the state.

In contrast, LLPs, often established by professionals like attorneys or doctors, might face additional costs related to professional licensing or accreditation. Further, some states have publication requirements where the formation of the entity must be announced in local newspapers, adding to the start-up cost.

Annual Requirements

Operational costs don’t end post-establishment. Most states require LLCs to submit an annual or biennial report, often paired with a fee. This report typically updates the state on key business details, such as addresses or management structure.

On the other hand, LLPs, especially those in high-liability professions, may have stricter insurance mandates to maintain their liability protections. This could lead to increased annual costs.

While LLCs in most states face these reporting obligations, some states exempt LLPs, whereas others do not.

Existence

The duration of a business entity’s existence can vary significantly. For LLCs, many states grant perpetual existence, allowing them to operate indefinitely unless dissolved by the members.

The operating agreement, a governing document for an LLC, can specify a particular dissolution date or event. In contrast, LLPs often have a more fragile existence.

The departure, death, or incapacity of a partner can trigger dissolution, unless their agreement contains provisions to manage such scenarios. This fragility necessitates careful planning for continuity in the case of LLPs.

Dissolution Process

The journey to close a business is multifaceted and can be emotionally taxing. Both LLCs and LLPs require a structured approach to dissolution. Initially, the entity must settle any outstanding debts and obligations.

Assets are then distributed amongst members or partners as per the agreed-upon structure. Following this, official paperwork, often termed as “Articles of Dissolution,” must be filed with the state, signaling the business’s end. Failure to follow proper dissolution processes can result in continued tax liabilities or even legal repercussions.

For LLPs, the exit strategy can be even more nuanced, especially when considering professional licenses and ongoing client obligations.

Advantages and Disadvantages of LLP Vs LLC

Exploring Taxation Differences: LLC vs. LLP

Understanding the nuances in tax treatment for LLCs and LLPs is crucial for making an informed choice about your business structure. Here’s a deep dive into how these entities are taxed and the implications for your business:

• Tax Classification Flexibility for LLCs: One of the most significant advantages of an LLC is its tax classification flexibility. By default, an LLC is taxed as a pass-through entity, meaning profits and losses pass through to members who report them on their personal tax returns. However, an LLC can also elect to be taxed as a corporation, providing potential tax benefits under certain circumstances.
• Self-Employment Tax Considerations: For LLC members, the self-employment tax is a critical consideration. As profits from the LLC are considered earned income, members must pay self-employment taxes, which cover Social Security and Medicare. This can be a significant expense, and planning for it is essential in financial management.
• LLP Tax Treatment: LLPs are always taxed as pass-through entities, meaning individual partners report their share of profits and losses on their personal tax returns. Unlike some LLC members, partners in an LLP are not subject to self-employment tax on their share of profits, potentially offering a tax advantage.
• Deductions and Allowances: Both LLCs and LLPs can benefit from various business deductions, such as operating expenses, employee salaries, and other business-related expenses. Understanding these deductions and how they apply to each entity can significantly impact your tax liability.
• State-Level Tax Considerations: Tax treatment for LLCs and LLPs can vary significantly at the state level. Some states impose additional taxes or fees on these entities, while others offer tax advantages. It’s crucial to understand the state-specific tax implications for your chosen business structure.
• Planning for Tax Efficiency: Effective tax planning is vital for both LLCs and LLPs. This includes understanding the tax implications of business decisions, such as distributions and allocations of profits and losses, and taking advantage of tax-saving strategies tailored to each entity’s structure.
• Professional Tax Advice: Given the complexities of tax laws and their variations by state, consulting with a tax professional is highly recommended. A qualified accountant or tax advisor can provide tailored advice, ensuring compliance and optimizing tax efficiency for your LLC or LLP.

The Bottom Line

By mixing some of the properties of corporations, partnerships, and sole proprietorships, the LLC and LLP offer compelling benefits for new companies. While both entities have distinct tax advantages, only LLPs give partners legal protection from the actions of another partner. For this reason, the LLP is better for a group of professionals who plan to actively participate in the company.

If you’re forming a business, take a look at your state law to first determine which entity is allowable in your state, as well as the state laws regarding personal liability for each entity.

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This article, "Legal Structure Difference: LLC and LLP – Which Is Right For You?" was first published on Small Business Trends

CorpNet offers business formations, filings, state tax registrations, and corporate compliance services in all 50 states. Express and 24 hour rush filing services available upon request. Click here to learn more.

In this article, we will examine what is an EIN number and discuss whether your business needs one in order to stay compliant with the IRS and other legal requirements. Let’s get started!

What is an EIN Number?

An EIN, also known as an Employer Identification Number, is a nine-digit number assigned exclusively to businesses and organizations by the Internal Revenue Service (IRS) to facilitate tax filing and reporting. It acts as a secure identifier for your business, similar to a social security number for individuals.

Here are some key points about an EIN:

• Issuance: EINs are issued by the IRS to businesses in the United States. To get an EIN, you can apply online through the IRS website, by fax, or by mail. The online application is the quickest method and you’ll receive your EIN immediately upon completion of the application.
• Necessity: If you have employees, operate a business as a corporation or partnership, or meet certain IRS requirements, you are required to have an EIN. Even some non-profit organizations, trusts, and estates must have EINs.
• Uses: EINs are used for a wide range of business tasks. These include opening business bank accounts, applying for business licenses, filing tax returns, and applying for loans or credit cards under the business name.
• Wage Reporting: Employers are required to include their EIN on all forms related to employee wages, such as W-2 and 1099 forms. This helps the IRS track income and tax obligations.
• Privacy Protection: Using an EIN for business transactions can help protect the business owner’s personal information. Without an EIN, sole proprietors must use their personal Social Security Number, which increases the risk of identity theft.
• Endurance: An EIN is permanent. Once an EIN has been assigned to a business, it will never be reused or reassigned to another business. Even if the business closes or is sold, the EIN will still be associated with that business entity.
• No Cost: There is no cost to apply for an EIN from the IRS. Be wary of websites or services that charge a fee to obtain an EIN.

In summary, an EIN is a critical identifier for businesses in the United States and plays a key role in many aspects of business operation and compliance with the IRS. So it’s important to be aware of the 1099 rules and the importance of filing taxes correctly and to simplify hiring. Obtaining an EIN is quick and easy and you can simply apply online in just a few minutes.

Who Needs an EIN Number?

The Internal Revenue Service requires businesses and organizations to obtain an EIN or federal tax ID number for tax reporting purposes.

However, not all businesses are required to have one. So who needs an EIN number? Here’s a list of business types that may need an EIN in order to stay compliant with the IRS:

• Sole proprietorships: What is a sole proprietor? Entrepreneurs who own their own business without formally creating a separate legal entity such as a corporation or LLC.
• Partnerships: This includes general partnerships, limited liability partnerships (LLPs), and limited partnerships.
• Corporations: Business entities that are legally separate from their owners, such as C-corps, S-corps, and professional corporations.
• Non-profit organizations: A specialized legal business structure created for charitable, religious, or educational purposes.
• Trusts and Estates: Wealthy individuals usually establish complex legal arrangements for tax or estate planning purposes. A trust or estate must obtain an EIN if they pay taxes, have employees, or operate a business.

When does the IRS require an EIN number?

Any business entity needs to understand when it’s necessary to get an EIN in order to accurately report taxes, properly manage its finances, and comply with IRS regulations. Let’s take a look at when the IRS requires an EIN number…

Sole Proprietorship

As a sole proprietor, you don’t need to obtain an EIN unless you have employees, operate your business as a corporation or partnership, file excise tax returns, or withhold taxes on income paid to a non-resident alien. This includes hiring seasonal employees.

Single-Member LLC

Single-member LLCs are not required to obtain an EIN from the IRS, though it’s a good idea to get one if you plan to open a business bank account or hire employees. Make sure to research what is an LLC to determine if it’s the right business entity for your needs.

Multi-Member LLC or Partnerships

Multi-member LLCs and partnerships must obtain an EIN in most cases. The IRS also requires businesses to obtain a new EIN if there has been a change in the composition of the LLC or partnership that affects its federal tax status.

Corporations

All corporations, including S-corporations and C-corporations, must obtain an EIN in order to file taxes and for other business-related activities.

Non-Profit Organizations

Non-profit organizations are required to obtain an EIN in order to file taxes and other legal documents.

Trusts and Estates

A trust or estate must obtain an EIN if they pay taxes, have employees, or operate a business.

Why Can’t I Just Use My Social Security Number?

Social Security numbers are issued to individuals and are not meant to be used for business or commercial purposes, so the IRS requires businesses to obtain a separate employer identification number (EIN).

Using a social security number for business activities could leave you vulnerable to identity theft since your Social Security Number is sensitive private information.

Using a Social Security Number would also make it difficult to accurately report taxes and other financial information related to your business.

An EIN is considered an official identifier and provides a secure way of managing your business’s finances and complying with IRS regulations.

How to Get an Employer Identification Number

Getting an EIN is free, easy, and can be done quickly online. Here are the simple steps needed to get yourself and EIN:

Step 1: Visit the IRS Website

The first step is to visit the IRS website and start the application process by clicking on the “Apply for an Employer ID Number (EIN)” link.

You’ll need to provide basic information about your business, such as its legal name, structure (sole proprietorship, LLC, etc.), address, and the type of business you’re conducting.

Step 2: Verify Your Identity

The IRS will then ask you to verify your identity by providing a valid driver’s license or other government-issued ID.

You can also provide a copy of your Social Security card if you don’t have a valid driver’s license.

Step 3: Submit Your Application

Once you’ve provided all of the necessary information and verified your identity, submit your application. The IRS will issue you an EIN within minutes.

Step 4: Recieve your EIN and Open a Business Bank Account

Once the IRS has issued your EIN, you can use it to open a business bank account. This is an important step in setting up your business and managing its finances.

International EIN Applicants

As an international applicant, you may need an EIN in order to open a business bank account or file taxes in the U.S.

The application process is similar to that of domestic applicants, but you may need to provide additional documents such as a passport, visa, or alien registration card.

Benefits of Having an EIN

Having an EIN can provide a range of benefits to businesses and other entities. The following are five key benefits of having an EIN:

• Improved credit rating. An EIN can help to establish a business’s credit ratings, making it easier to get loans and leases.
• Separate identity. Having an EIN allows a business or entity to separate its identity from its owner’s personal taxes.
• Deductible expenses. With an EIN, businesses can take advantage of certain tax deductions, such as employee salaries and business equipment purchase costs.
• Open bank accounts. Many banks will require an EIN in order to open a business account.
• File taxes. An EIN is necessary for filing state and federal taxes each year.

Role of an EIN in Business Loans and Credit

An EIN is often a prerequisite for small businesses seeking loans or lines of credit. Lenders typically require an EIN to process loan applications, as it helps them assess the business’s creditworthiness and financial health. Having an EIN separates your personal and business finances, thereby protecting your personal credit score.

EIN and Business Identity Protection

Using an EIN instead of your Social Security Number (SSN) for business transactions enhances your privacy and reduces the risk of identity theft. It acts as a buffer, ensuring that your SSN is not exposed in various business activities, such as vendor contracts or credit applications.

EIN for International Business Entities

For international entities doing business in the U.S., obtaining an EIN is crucial. It allows them to comply with U.S. tax regulations, open U.S. bank accounts, and conduct business transactions smoothly. The process for international applicants might include additional documentation but is generally straightforward.

EIN in Organizational Changes

If your business undergoes significant changes, such as restructuring from a sole proprietorship to a corporation, you might need a new EIN. This change reflects the new legal entity and maintains accurate tax records. It’s important to consult with a tax professional to understand when a new EIN is necessary.

Annual Reporting and EIN

An EIN is essential for annual reporting requirements, such as filing business tax returns. It helps the IRS track your business’s tax liabilities and ensures that your filings are accurate. Keeping your EIN information up-to-date is important to avoid any potential issues with the IRS.

Closing a Business and EIN

If you decide to close your business, your EIN will still be associated with the business entity. While the EIN itself cannot be “closed,” you should inform the IRS that your business is no longer operating. This step ensures that your business’s tax obligations are properly concluded.

Are there any disadvantages of having an EIN?

While having an Employer Identification Number (EIN) can provide a range of benefits to businesses and other entities, there are also some potential drawbacks.

These include additional administrative costs such as filing fees, the complexity of tracking multiple EINs associated with the entity, and changes made to the company must be reported promptly in order for the EIN to remain valid.

EIN Vs. DUNS Number

It’s important to know what is a DUNS number and how it can be beneficial to a business. An EIN and a DUNS number both provide unique identification numbers to their owners.

However, the two are not interchangeable and serve different purposes as shown in the table below.

Employee Identification Number vs. Federal Tax Identification Number (TIN)

An Employee Identification Number and an Individual Taxpayer Identification Number (TIN) are different types of unique identification numbers issued by the IRS. Let’s take a look at both in the table below…

EIN Vs Federal Employee Identification Number (FEIN)

An EIN and Federal Employee Identification Number (FEIN) are both issued by the IRS and provide unique identification numbers to their owners. Let’s take a look at how they’re different in the table below…

Do I need an EIN if I’m self-employed?

Yes, even if you’re not formally creating a business entity such as a corporation or LLC, self-employed individuals, or the “responsible party” as the IRS calls it, may still need an employer identification number (EIN).

The IRS requires all businesses to obtain an EIN in order to accurately report taxes and other financial information related to the business.

It’s also a more secure way of protecting your sensitive personal information since the number is only used for your business activities.

Does a DBA need an EIN?

Yes, if you’re starting a business under a Doing Business As (DBA) name, you are required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service.

Using a separate EIN helps protect your personal information since the number is associated with your DBA and not with your Social Security Number.

What is a federal employer identification number?

A Federal Employer Identification Number (FEIN) is a unique nine-digit identification number assigned by the Internal Revenue Service (IRS).

This number is used to identify and track the finances of a business or other entity for tax purposes.

A FEIN is required for many legal transactions, such as filing taxes or opening a business bank account. Having a FEIN also provides businesses with protection from identity theft and fraud.

Do I need an EIN before or after I form my LLC?

Generally, the best time to obtain your EIN and file for tax-exempt status is after you’ve formed your LLC. This way, you have all of the information needed to properly fill out the form and avoid any delays.

After you form your LLC, you can apply for an EIN online or by printing and mailing Form SS-4 to the IRS.

How do I look up my EIN?

Unfortunately, the IRS does not have a public database for looking up EIN numbers. You can find your EIN on the EIN confirmation letter the IRS sent you when your application for the number was approved.

If you do not have this letter, you can also check documents like tax returns or forms filed with the IRS.

If you don’t have access to these documents, you can call the IRS Business & Specialty Tax Line for assistance in finding your EIN at 800-829-4933.

How do I look up another business’s EIN?

Looking up another business’s EIN doesn’t have to be complicated. You can start by simply asking the company directly for their EIN.

Alternatively, if you are looking for a publicly traded company, check out their SEC filings which often contain the necessary information.

Additionally, inquiring with a credit bureau may also provide insight into the business’s EIN.

Lastly, there are numerous paid EIN databases available so you can quickly and easily look up the requested information.

How do I recover my EIN if I forget or lose it?

It’s important to put your EIN confirmation letter in a safe place to avoid losing your EIN in the first place.

However, if you forget or lose your EIN, the process of recovering it is fairly straightforward. You can find your EIN on forms such as tax returns or other forms you filed with the IRS.

If you don’t have those, give the IRS Business & Specialty Tax Line a call and ask them to search for your EIN at 800-829-4933.

Image: Depositphotos

This article, "What is an EIN Number, and Does Your Small Business Need One?" was first published on Small Business Trends

When the phrase “annual shareholder meeting” is mentioned, what picture does it conjure in your mind? Is it a grand gathering of influential figures at the forefront of industry giants like Amazon, Exxon or Apple?

Or perhaps your mind veers towards a more local scenario, picturing someone like Jim, who operates a small landscaping business from his residential premises?

Several owners of small businesses choose to become incorporated, often by establishing either a C Corporation or S Corporation).

They do this primarily to safeguard their personal assets from potential business-related liabilities. Additionally, the currently reduced corporate tax rate makes the C Corporation an appealing choice for businesses of various sizes.

Whenever a C or S corporation is formed, it’s crucial to comply with the corporate administrative requirements of your state, even if your corporation consists of just one person. These stipulations necessitate the hosting and documentation of both board and shareholder meetings.

Single Owner Corporations

This piece will provide insights into single owner corporations. A phenomenon that’s becoming increasingly commonplace, single owner corporations bring with them a unique set of challenges and advantages.

In particular, we’ll respond to some of the most typical questions asked about a single owner corporation and the administrative requirements that come with running one.

1. Can I Have a Single Shareholder Corporation?

Indeed, it is possible to have a single shareholder corporation. In fact, every state across the U.S. permits a single individual to both form and govern a corporation.

They also allow for the corporation to have just one director, opening up the possibility for you to take up the roles of the sole shareholder, director, and officer of your company.

This means you can effectively oversee and steer your corporation single-handedly.

2. What are the Administrative Meeting Requirements for a Single Shareholder Corporation?

All corporations, regardless of size or number of shareholders, are legally required to hold at least an annual shareholder meeting and a board of directors meeting.

While it’s feasible and at times necessary to hold additional meetings, the minimum is firmly set at one per year.

This requirement holds true even for single shareholder corporations. It’s an essential part of maintaining good corporate governance and fulfilling statutory obligations.

3. What should I Discuss in the Annual Shareholder Meeting?

The annual shareholder meeting is primarily dedicated to electing the corporation’s board of directors for the upcoming year.

In larger corporations, this process can become a competitive and heated affair, with various candidates vying for a spot on the board. For single shareholder corporations, however, the process is considerably simpler.

In essence, you can unilaterally decide to appoint yourself as the director. Following this, you must create meeting minutes that demonstrate that you, the sole shareholder, have elected yourself as the lone director of the board.

4. What Should I Discuss in a Board Meeting?

A corporation’s board of directors is typically tasked with making impactful financial decisions, ones that substantially affect both the corporation and its shareholders.

This responsibility spans a range of decisions such as issuing stock, approving loans or acquisitions, appointing officers, setting officers’ remuneration, approving raises, and announcing dividends.

In the context of single owner corporations, the most recurrent topic you’ll likely “discuss” and record pertains to notable changes in your compensation and any distributions of dividends.

5. How do I Document a Meeting?

For both the board of directors meeting and the annual shareholder meeting, it’s essential to create what are known as meeting minutes.

While these minutes don’t have to detail every single discussion or event that occurred, they must accurately document the main points and any decisions that were reached. Typically, these meeting minutes consist of:

• The date, time and location of the meeting
• Who attended. Note: for a board of directors meeting where you’re the only one attending, you’ll need to document that you hold all three officer positions (CEO, CFO/treasurer and secretary) and are in attendance.
• Agenda items with a brief description of each item
• Voting actions – in the case of a single shareholder corporation and single director, you’ll just be documenting how you voted
• Time when the meeting was adjourned

You aren’t obliged to create meeting minutes from scratch. Several free templates are readily available online to act as a framework.

Utilizing a template not only makes the task less daunting but can also ensure you meet your administrative responsibilities promptly.

Importantly, there is no requirement to file your minutes with the state or any other body. They should, however, be stored safely with your other significant corporate records, such as articles of incorporation, bylaws, and resolutions.

6. Do I Really Need to Bother with This?

When operating as a single shareholder and director, it can be tempting to sidestep corporate formalities. This might seem inconsequential in the short term, but neglecting these requirements could potentially jeopardize your liability protection.

Maintaining your corporation’s status as a separate legal entity requires adherence to certain corporate formalities, like holding an annual shareholder meeting or filing your annual report.

If you face a lawsuit, the opposing party may argue that your corporation hasn’t fulfilled its corporate obligations and is merely an extension of your personal affairs.

If they manage to make a persuasive case, they might be able to get a judgment against your personal assets in addition to your company’s resources.

The takeaway message is clear: you must hold an annual shareholder meeting and an annual board of directors meeting, irrespective of the size of your corporation.

As a sole shareholder/owner, your meetings and decisions are likely to be straightforward.

It’s crucial to take a little time to conduct your meeting and record it properly. By doing so, you’ll be safeguarding your corporation’s good standing and preserving your limited liability status.

Let’s take a moment to visually compare the key characteristics of Single Owner Corporations and Multiple Shareholder Corporations. The following table provides a concise overview of these two forms of corporations:

Aspect	Single Owner Corporation	Multiple Shareholder Corporation
Number of Shareholders	1	More than 1
Board of Directors	Can be the same person as the shareholder	Must be elected by shareholders
Administrative Requirements	Must hold an annual shareholder meeting and board meeting	Must hold an annual shareholder meeting and board meeting
Meeting Complexity	Typically less complex due to single decision maker	Typically more complex due to multiple decision makers
Legal Liability	Personal assets could be at risk if corporate obligations aren't met	Personal assets are typically protected if corporate obligations are met
Financial Decisions	Made by the single shareholder	Made by the board or voted on by shareholders

Single Owner vs Multiple Shareholder Corporations: Key Considerations

In addition to the specific points already discussed, it’s important to understand the broader distinctions and implications of operating as a Single Owner Corporation versus a Multiple Shareholder Corporation. These differences can significantly impact managing, structuring, and growing your business. Here’s a closer look at some key aspects:

1. Decision Making and Control:

   • In a Single Owner Corporation, decision-making is streamlined and quick, as only one person is making all the crucial decisions. This can be highly efficient but also places all responsibility on the single owner.
   • Multiple Shareholder Corporations involve more stakeholders, necessitating a more complex decision-making process. While this can lead to more diverse perspectives and potentially better decisions, achieving consensus also requires more time and effort.

2. Raising Capital and Expansion:

   • Single Owner Corporations may face challenges in raising capital as they rely on the resources of one individual. Expansion might be limited by the owner’s finances and capacity to secure loans.
   • Multiple Shareholder Corporations can raise capital more quickly through the sale of stock and may have access to a wider range of resources, making expansion and growth more feasible.

3. Legal and Tax Considerations:

   • Single Owner Corporations often have simpler legal and tax reporting requirements, but they also miss out on some of the benefits that come with having multiple shareholders, such as the ability to distribute profits among several individuals to potentially lower tax liabilities.
   • Multiple Shareholder Corporations face more complex legal and tax landscapes but can leverage these complexities for financial benefits, such as through tax strategies that are unavailable to single owners.

4. Succession Planning:

   • For Single Owner Corporations, succession planning is critical, as the entire business hinges on one individual. Planning for the future and potential incapacity or retirement of the owner is crucial for continuity.
   • In Multiple Shareholder Corporations, the impact of losing one shareholder is usually less significant. Succession planning involves multiple parties and can offer more stability and options for the business’s future.

Understanding these differences is essential for any entrepreneur or business owner as they plan their corporation’s structure and strategy. Whether operating as a single owner or with multiple shareholders, each has its unique advantages and challenges that must be carefully navigated for long-term success.

CorpNet offers business formations, filings, state tax registrations, and corporate compliance services in all 50 states. Express and 24 hour rush filing services available upon request. Click here to learn more.

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This article, "What Solo Owners of Corporations Need to Know About Annual Meetings" was first published on Small Business Trends

What is a DBA?

A DBA, or Doing Business As, is an alternative name for a business that may be different from the legal name of the registered owner.

This allows businesses to operate under multiple names without having to register a completely new business entity.

A DBA can also be used to protect the identity of a company’s owners or provide extra privacy in business operations.

When registering a DBA, you will need to take care to ensure the name isn’t infringing on any existing copyright laws or brand names.

What a DBA is Not When You Conduct Business

It’s important to understand that a DBA is not the same as other legal business entities, such as a corporation or LLC. A DBA is simply an alternate name for conducting business and does not guarantee protection from personal liabilities.

As you learn how to start a business, here are five key points to keep in mind with regard to DBAs:

• Tax Identifier: A DBA does not provide a unique tax identifier like an Employer Identification Number (EIN).
• Legal Structure: A DBA cannot change the legal structure of the underlying business entity.
• Ownership: A DBA does not establish ownership of the company or trademark any products or services.
• Filing Papers: A DBA registration is often filed without needing extensive paperwork.
• LLC Protection: Filing a DBA will not protect the owner from personal liabilities in the way an LLC can.

Do I Need a DBA?

Deciding whether or not you need a DBA (Doing Business As), also known as a fictitious business name, depends on various factors related to your business structure and operational needs. Let’s delve into why and when different types of business entities might require a DBA:

Sole Proprietorship

For sole proprietors, registering a DBA is often essential. This is particularly true if you plan to conduct business under a name other than your own legal name. A DBA allows sole proprietors to use a more marketable business name without forming a corporation or LLC, offering flexibility and simplicity in branding.

It’s also crucial for practical reasons – banks typically require a registered DBA for opening a business bank account under your business name, and it may be needed for legal or contractual purposes.

Partnerships

Similar to sole proprietorships, partnerships benefit from a DBA for enhanced professionalism and broader business opportunities. Registering a DBA allows partnerships to operate under a business name that reflects their joint venture, rather than using the partners’ individual names.

This can be critical for marketing, legal contracts, and financial transactions, helping to establish a separate business identity and facilitating smoother business operations.

Franchise

For franchise owners, a DBA is often necessary to align with the franchisor’s brand while adhering to local legal requirements. Registering a DBA in each state where the franchise operates ensures consistency in branding and legal compliance. It allows franchisees to use the franchisor’s trademarked name legally and helps in protecting the brand identity across various locations.

LLC

While an LLC (Limited Liability Company) already offers a degree of separation between personal and business liabilities, registering a DBA can further enhance this distinction.

For LLCs operating under different trade names or exploring diverse market niches, a DBA is useful for each unique business operation. It allows for easier management of different business lines under one LLC umbrella and can be beneficial for branding, legal contracts, and financial transactions.

By understanding these different scenarios, you can better determine whether a DBA is necessary for your business. Remember, the requirements and benefits of a DBA can vary based on your specific business activities, structure, and the legal landscape of your operating region.

Taking this DBA quiz can provide additional tailored insights for your business, helping you make an informed decision about whether registering a DBA aligns with your business objectives and legal requirements.

Pros of DBA

A Doing Business As (DBA) registration offers several advantages for businesses and can be beneficial in many areas. Here are some of the main benefits of registering a DBA:

• Establish Credibility – When you register a DBA, your company is legally recognized by the state. This adds an extra layer of credibility to your business that can help you attract customers, investors, or creditors compared to operating under a sole proprietorship or partnership.
• Brand Protection – Using a DBA helps protect your trademarked brand name from being infringed upon by other companies outside of your network.
• Separate Identity – Although filing as an LLC provides protection from personal liabilities, having separate legal entities like DBAs give businesses added legitimacy while also providing extra protection in taxes, contracts, and other aspects of operating within their respective jurisdictions.
• Add Flexibility – Perhaps the most obvious advantage of using a DBA is the flexibility it provides for those who want to operate under an alternate name without forming a new corporation or LLC.
• Cost Savings – Registering a DBA is usually much cheaper than forming a corporation or LLC, so if your goal is simply to operate under an alternate name without incurring additional expenses then setting up a DBA might be the way to go.

Cons of DBA

Although there are numerous advantages to registering a DBA, there are also some drawbacks that are important to consider. Here are a few of the most common disadvantages of setting up a DBA:

• Limited Liability Protection – As mentioned earlier, DBAs provide some protection from personal liabilities but it is not as comprehensive as what you would get by forming an LLC or corporation.
• Restricted Trading and Transferring – Depending on the state in which your business is registered, using a DBA may limit you from trading stocks, transferring interest, and engaging in other activities usually reserved for incorporated entities.
• Confusion for Consumers – The use of multiple DBA names may confuse potential customers and impact your ability to build brand recognition within a given market.

How to Get a DBA: Your Complete Guide as a Business Owner

Getting a Doing Business As (DBA) registration for your business can be rewarding and beneficial in several areas, including the protection of your brand and additional recognition as a legal entity. Here is a complete guide on how to get a DBA:

Step 1: Research Whether You Need One

The first step in the process of setting up a DBA is to do some research and determine whether it’s necessary or not. Depending on the type of business you’re running or the activities you plan to undertake, registering as an LLC or corporation may provide better protection than simply filing a DBA.

Step 2: Choose Your Name Carefully

When selecting your name for the DBA, make sure it isn’t too similar to any current businesses in your state so as to avoid potential trademark infringement issues. Also, ensure that your proposed name complies with all federal, state, and local rules and regulations pertaining to “doing business as” names.

Step 3: Check For State Registration

Check with the Secretary of State or county clerk’s office in the state you are operating in for information about registering for a DBA. Many states require you to register before you may begin operations under that name. This helps protect your brand from other businesses in your area that could potentially use the same name.

Step 4: Fill Out the Necessary Forms

Once you have done some research and decided on your preferred name, proceed by filling out forms provided by the Secretary of State’s office. Make sure all form data provided is accurate so as not to risk rejection during processing. Also, pay attention to any fees attached to registering a DBA before submitting it for consideration.

Step 5: File Your Fictitious Name Statement

After completing your forms with accurate information and paying associated fees, submit them together with any necessary documents required by your state law such as proof of identity or the existence of the company. Once this process has been completed successfully, you should receive confirmation from your state’s Secretary of State Office that your registration was approved and accepted. At this point, you will officially become part of their registration database with an approved DBA name.

The DBA Filing Deadline

The DBA filing deadline varies from state to state but in general, you should submit your application as soon as possible to ensure your business is properly registered.

To ensure no delays or potential fines, make sure to check the exact requirements for your state before submitting a DBA filing.

Depending on the state law you may have to submit it within days of establishment or not at all. Some states allow a certain period after which DBAs expire if not renewed.

Each county may also require separate filings and regulations pertaining to DBAs, so be sure to research this ahead of time in order to comply with all applicable laws.

Tips for Filing a DBA

Filing a DBA (Doing Business As) can be an essential step for many businesses. It allows your business to operate under a name different from its legal, registered name. Here are some detailed tips to guide you through the process:

Know Your State Requirements

Every state has its own set of rules and regulations for filing a DBA. It’s crucial to familiarize yourself with the specific requirements of your state to ensure compliance. This includes understanding deadlines, fees, and any unique filing procedures.

Some states may require publication of your DBA in a local newspaper, while others may have different renewal timelines. Check with your state’s Secretary of State website or a local small business development center for accurate information.

Gather All The Necessary Documents

Prepare all required documents before beginning the filing process. This typically includes valid identification (like a driver’s license or passport), proof of your business address (such as a utility bill or lease agreement), and potentially additional paperwork depending on your state’s requirements. Having everything ready beforehand can streamline the filing process and prevent delays.

Choose A Name For Your Business

Selecting a unique and appropriate name for your business is crucial. Conduct a thorough search in local business databases to ensure that your desired name isn’t already in use. Remember, your DBA name should align with your brand identity and be easily recognizable to your customers.

Some states have specific restrictions on the kinds of names you can use, so it’s important to verify these details as well.

File The Appropriate Forms With The Secretary Of State’s Office

Once you have all the necessary documents and have chosen a suitable name, complete and submit the required forms to your state’s Secretary of State office. Be sure to include the correct filing fee, which varies by state. Some states allow online filing, while others may require mail or in-person submissions. Ensure that all information is accurate and complete to avoid processing delays.

Create An Operating Agreement For Your Business

For certain business structures, like LLCs, it’s advisable to create an operating agreement. This document outlines the ownership structure, roles, and responsibilities of each member, and the operational procedures of the business. While not always required, an operating agreement is crucial for clarifying the legal structure and operational guidelines of your business, especially when using a DBA.

Submit A Registered Agent Notification To Your State Government

A registered agent acts as your business’s official point of contact for legal documents. When you file your DBA, you may also need to submit a registered agent notification. This is particularly important if your registered agent’s details change.

The registered agent must be available during standard business hours and is responsible for receiving important legal and tax documents on behalf of your business.

By following these tips, you can navigate the DBA filing process more confidently and ensure that your business complies with all the necessary legal requirements. Remember, while the process can vary slightly from state to state, the fundamental steps remain largely the same.

The Bottom Line

A Doing Business As (DBA) provides a valuable tool for entrepreneurs seeking to operate under an alternate name distinct from their registered legal entity. This flexibility allows businesses to establish a unique public identity, making it easier to connect with customers and establish a recognizable brand presence.

Properly navigating the process of setting up and registering a DBA is essential to ensure compliance with regulations and unlock the full potential of the new name. Here’s how following the right steps can lead to a compliant and successful DBA implementation:

• Distinct Public Identity: Registering a DBA enables businesses to operate under a name that better aligns with their brand vision, target audience, or specific product lines. This distinct public identity can enhance brand recognition and set the stage for effective marketing and customer engagement.
• Legal Compliance: Following the correct process for setting up and registering a DBA ensures that your business operates within the bounds of the law. Failure to properly register a DBA can lead to legal complications and potential financial penalties.
• Business Startup Checklist: Having a comprehensive business startup checklist at hand can be an invaluable resource when setting up a DBA. This checklist should cover the necessary steps, documentation, and deadlines involved in the registration process.
• Benefits Utilization: A registered DBA unlocks various benefits for businesses, including improved branding, marketing opportunities, and better customer recognition. These advantages can contribute to business growth and success in the competitive marketplace.
• Compliance with Applicable Laws: Each jurisdiction may have specific requirements and regulations for registering a DBA. By following the right steps, businesses can ensure compliance with all relevant laws and avoid potential legal issues down the road.
• Smooth Transition: Properly registering a DBA allows for a seamless transition to the new name without disruptions to business operations. This smooth implementation minimizes confusion among customers, vendors, and other stakeholders.
• Brand Strategy Alignment: Ensure your chosen DBA aligns with your overall brand strategy and values. A well-thought-out name can strengthen your brand’s positioning and resonate with your target audience effectively.
• Regular Review: Regularly review your DBA registration to ensure it remains up-to-date and reflective of any changes in your business. This includes updating the name if there are shifts in products, services, or branding.
• Seek Professional Advice: When in doubt, seek legal and professional advice to ensure compliance and address any concerns related to the DBA registration process. Professional guidance can offer clarity and peace of mind.

In conclusion, setting up and registering a DBA is a strategic move for businesses seeking a unique public identity and brand presence. By following the correct procedures, businesses can operate legally under their new name and leverage the benefits it brings to establish a stronger market presence and customer connection.

Am I legally required to have a DBA to operate under a different name?

Generally speaking, you are not legally required to register a DBA in order to operate under a different name than your legal name.

That said, it’s important to check the local rules and regulations of your state or jurisdiction as they may require some businesses to register their DBAs and/or obtain a small business license.

How long does a DBA (Doing Business As) Last?

A DBA typically lasts as long as the business is in operation, but it can be renewed at any time if needed. Generally, a DBA will remain in effect until the business owner decides to close an inactive business or until there are changes made to the name or the state laws that require a renewal of registration.

How do taxes work with a DBA?

Taxes for a DBA can vary depending on the type of entity or if you’re operating your business in multiple states.

Generally, DBAs registered as sole proprietorships are subject to self-employment taxes, while DBAs that are corporations or limited liability companies (LLCs) may be eligible for different tax treatments.

It is important to consult with a tax professional to determine the best option for filing any taxes associated with a DBA.

Can I use the same DBA as someone else?

No, it is not possible to have two businesses with the same DBA. The name chosen must be available and not infringe on any other existing businesses’ names. Before registering a DBA, it is important to check with the Secretary of State in your state that the name you desire has not been taken. The secretary of state’s website will also typically provide guidelines for completing the registration process.

What is the difference between DBA and LLC?

The main difference between a DBA and an LLC is the type of legal structure they provide. A DBA is used to register a business name under an individual, allowing them to use that name for their business.

An LLC provides more formal legal protection and structure than a DBA does. With an LLC, liability is limited to the assets of the business and not the personal assets of its owners, while DBAs provide no such protection.

Do you need a business bank account to apply for a DBA?

No, you do not need a business bank account to apply for a DBA. The registration process can be done online and will typically require providing proof that the name is available in your state. Once the paperwork is approved, you may open a business bank account if necessary.

Is LLC better than DBA?

It depends on the individual’s needs and goals. An LLC provides more formal legal protection and structure than a DBA, while liabilities are limited to the assets of the business rather than personal ones.

LLCs must also file annual reports and pay taxes in most states, while DBAs typically do not have such obligations. Therefore, an LLC may be better for certain types of businesses compared to a DBA.

Either way, make sure to close an inactive business to avoid any potential confusion or legal issues.

What is a DBA example?

If your company’s official legal business name is XYZ Enterprises LLC but you want to open a liquor store under the name ABC Liquor Store, you can register the DBA ABC Liquor Store. This would allow you to use the DBA for business transactions and documents without having to change your legal business entity name.

How do I transfer my DBA to an EIN?

Once a business has a tax ID, the small business owners may decide to operate under one or several DBAs (Doing Business As). Regardless of whether taxes are paid through an SSN or EIN (Employer Identification Number), these DBAs are essentially nicknames for the existing business and therefore don’t require separate tax IDs.

How much does a DBA cost?

The cost of registering a DBA varies from state to state but is typically less than $100. Some states may also require additional fees for registering at the county level, so be sure to research your own state before beginning the registration process.

Make sure to also do proper research if you’re planning to register your business in another state. Having a small small business compliance checklist may be helpful.

Is a DBA a business entity?

No, a DBA is not its own legal business structure or entity. It simply allows the owner to conduct business under a name that is different from the one they would normally operate with. For example, getting certified as a woman owned business or applying for certain grants may require a DBA, as many of these programs have specific criteria that must be met.

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This article, "What is a DBA (Doing Business As) and How to Register One" was first published on Small Business Trends

A legal entity involves different individuals coming together to run a business. Various aspects affect the operations of a business depending on its type — from taxation, liability for debts, and obligations of the owners.

State laws govern the business formation, meaning the rights and obligations of business owners are set by the state that is its legal home.

To gain recognition, a business entity needs a separate identity from its owners, especially corporations, partnership businesses, or LLCs. All such companies should be legally registered in their home state. Here, the rights and responsibilities of business owners are governed by the laws of the state in which the company is incorporated.

LLCs are highly popular among businesses since it limits owners’ responsibility. The limited liability company (LLC) is a relatively modern corporate form with several advantages for its owners. Some well-known examples include IBM, Sony, Pepsi-Cola, Nike, Blackberry, eBay, etc.

If you are about to register your own business, here are some key aspects you should never overlook.

#1. Tax Considerations

Tax implications are one of the key things to consider when setting up a new business. Your business may be subject to corporation or sales taxes if you are into selling goods. There are also municipal, national, and individual taxes depending on the size, state, and structure of your business operations. Therefore, it is a good idea to consult professionals like doola to help pick the right state and structure for forming your LLC and minimizing tax liabilities, given how your company’s legal structure decides your business’s tax burden.

Sole proprietorships and partnerships are common forms of company organizations where you are treated as the same entity as the business. Therefore, any gains or losses attributable to your ownership stake in the firm are included in your personal income.

For liability and tax reasons, opt for C-corporation as they are treated independently from your income. Meaning; that the business losses or gains can not affect your taxability. The Tax Cuts and Jobs Act (TCJA) set a new, uniform corporate tax rate of 21%. Profits are given to shareholders after paying the taxes.
Each shareholder’s part of such gains is taxed at a personal rate as per “double taxation”—this policy results in two separate tax payments: one by the company and another by the shareholders.

#2. Forms, Filings, and Deadlines

The type of business structure also defines the severity of your involvement in the business. LLC, for instance, would have many periodic filings and deadlines compared to a sole proprietorship.

Starting up would require you to file the paperwork and establish an official entity. The amount of such documentation differs depending on the business structure.

Moreover, you may also need to provide:

• Operating agreements
• Intellectual Property agreement, if needed
• Non-Disclosure Agreements (NDA)
• Purchase and sale agreements among stockholders
• Employment agreements

There are different criteria for creating legal paperwork to sell certain items and services. Verify that you have completed all necessary company paperwork depending on your business type, the products and services you sell, the state where your business operates from, etc.

There are plenty of hoops to go through — notifying the IRS whether you are now self-employed, registering for VAT, forming an LLC, and getting the necessary health and safety certifications. You might face a hefty fine if you don’t comply with filing and documentation compliance rules.

#3. Administration and operation

The administrative and operational powers differ across different types of company structures. For instance, a corporate body will have its most important decisions taken by the board of directors.

No matter if a company ventures out as a sole proprietorship, as it grows in terms of profits and capital, it needs to change into an LLC or a type C corporation. In doing so, the decision power is distributed to the board of directors, where every major decision that affects the company should be written down.

A partnership business can have a deed that decides the administration and operations of the company. But, corporations are owned by their shareholders rather than their employees, unlike sole proprietorships, partnerships, and LLCs.

Depending on the company’s structure, shareholders may or may not be eligible for executive positions. Mark Zuckerberg, for instance, has the dual role of corporate executive and shareholder at Facebook, but this is not the case for all Facebook stockholders.

Therefore, it is better to navigate the right path for your business growth, considering the administrative and operational decision-making before choosing a legal identity. For instance, a company’s Articles of Incorporation (AOI) include a list of incorporators and corporate executives (also known as directors) who take up different roles.

#4. Compliance costs

You should be aware that maintaining an active US corporation incurs several bare minimum fees to keep your business functional. It is better to monitor other operational expenses to ensure seamless business operations.
Apart from the general operating cost of your business like payroll, travel, rent, depreciation, etc., below are some key compliance costs you need to consider when starting a new business.

• Annual Franchise Tax Fees: if you are running a franchise business as an LLC or corporation, the annual franchise tax ranges from $200 to $1000. Here’s how to calculate.
• Service and attorney fees for incorporation: States charge between $1,000 and $1,200 for companies, $1,500 for S-Corporations, and LLCs between $500 to $900.
• Accounting and tax preparation costs: Ranges from $100 to $5000 a year$100 to $5000 a year. The fine for not filing the tax is $10,000 minimum.
• Other expenses include operating agreements (as mentioned before), startup insurance, industry-specific licensing like restaurant business needed Food Shop License, etc.

For more, read this post on how much it costs to incorporate in each state.

#5. Consider fundraising and future aspects

Consider exploring possibilities like a small business loan or a crowdfunding campaign for your business entity. The sources from which you can fund your business depend on its type and vision. For instance, registering a sole proprietorship or a partnership business will not let you seek funding from financiers and investors. Instead, you’ll rely on personal funds, a bank loan, credit from friends and family, or occasional grants from the government or non-profits.

Some proprietors can get off the ground without outside funding (also known as “bootstrapping”). But, it also exposes them to greater financial risk.

Otherwise, a corporation or an LLC can benefit from the following fundraising options:

• Seed Financing
• Accelerator
• Small Business Loan
• Venture Capital Financing
• SBA investment programs

Wrapping up

Considering the above-mentioned factors can help you navigate the right structure to establish your company. Primarily, it is best to consult compliance experts before weighing the pros and cons of different business structures and, vis-à-vis, factors affecting each.

Starting a new company is exhilarating, but like any adventure, it comes with its fair share of considerations to make it work smoothly — both before and after you incorporate a business.

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This article, "5 Things to Consider Before Creating a Business Entity" was first published on Small Business Trends

Deciding on a business structure for your business affects more than just how you’ll file taxes. Ramifications range from legal, administrative, and financial to your company’s name. Businesses with more than one owner typically structure their companies as limited liability companies (LLCs) or partnerships.

LLC vs. Partnership

That decision ultimately has vast consequences, so let’s break it down to see the proper structure for your business.

Partnership Basics

By default, businesses with more than one owner are considered partnerships in the states where the company is formed. Like a sole proprietorship, each partner owns an equal portion of the assets and liabilities of the business unless stipulated differently in the partnership agreement. Also, while no specific filing or registration procedures are required to start a partnership, partnerships must still comply with the permits, licenses, filing, and tax requirements expected of all businesses.

There are several types of partnerships depending on how the company is structured and where it’s based.

• General Partnership (GP). The general partnership is the most straightforward partnership structure—easy to form and easy to dissolve. Once the two (or more) partners create and sign the formal partnership agreement, the business is official. There is no required registration with the state. A general partnership divides ownership and profits equally unless different conditions are outlined in the partnership agreement. Likewise, all partners have equal power to make company decisions about contracts and financing. In addition, each partner retains equal liability and is held responsible for the company’s debts and legalities. Finally, general partnership owners are not employees of the company. Instead, they receive owner draws.
• Limited Partnership (LP). Unlike the general partnership, limited partnerships require registration with the state. They must follow state laws regarding information in a limited partnership agreement, reserving an LP company name, partner duties, and annual reporting obligations. Limited partnerships are for partners seeking investors but who don’t want to deal with the more complicated compliance issues involved with forming a corporation or LLC. The structure of limited partnerships involves at least one designated general partner and one or more limited partners. The limited partners invest money into the company but do not actively participate in the company’s daily operations. The general partner handles day-to-day operations. In addition, the limited partners share in the company’s profits but never the debts and liabilities and therefore never lose more than they’ve invested.
• Limited Liability Partnership (LLP). Not all states recognize limited liability partnerships, and some require the company to register as a Professional Limited Liability Partnership or PLLP. In essence, the limited liability partnership is a business structure used principally by professionals (e.g., attorneys, accountants, physicians, engineers, dentists, architects). Also, typically the state requires all partners to be licensed in the same profession. While the LLP does allow for equal responsibility of all partners, it limits the partners’ personal liabilities. Again, the amount of personal liability protection varies by state. 

There is also a partnership referred to as a Limited Liability Limited Partnership (LLLP) in the real estate industry. In this structure, all partners have limited risk and work as an advantage for investor groups looking to build large hotels, commercial buildings, and apartment communities.

All in all, starting a partnership is relatively easy and features minimal paperwork and few regulations. Still, a partnership can also open the owners to unwanted risk and damaging personal liability. For those reasons, many co-owners choose to form a limited liability company.

Limited Liability Company (LLC)

The LLC is a formal business structure, a legal entity registered with the company’s home state and accountable for the rules and regulations afforded to LLCs within the state. Unlike a partnership, LLC owners are considered separate from the company and are not responsible for the company’s debts and liabilities. According to state doctrine, LLCs (when correctly formed and compliance is kept up to date) maintain their obligations regarding the business’s liabilities, protecting owners from lawsuits and debt concerns.

In an LLC, owners are called “members.” According to the IRS, most states do not restrict ownership so that members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members in an LLC, and most states allow a single owner to form an LLC. In fact, many sole owners form an LLC for the protection from personal liability it affords. When there is more than one owner/member, the LLC is referred to as a “multi-member LLC,” and all members enjoy the same liability protections.

Essentially, the LLC is a hybrid of a partnership and a corporation. Like a corporation, the primary advantage is, as the name implies, the limited liability of the owners/members. However, there is also a tax advantage, which we’ll discuss later. 

Another advantage is the LLC’s management flexibility. An LLC can be member-managed or manager-managed, depending on the discretion of the company owners. 

• Member-managed LLC: The owners/members manage the daily operations of the business. 
• Manager-managed LLC: The owners/members designate one (or more) managers to oversee the company. 

By default, most states consider LLCs to be member-managed unless the operating agreement specifies something other.

In most states, the requirements for an LLC are as follows:

• Choose and register a unique business name. The name should contain the term LLC.
• Fill out and file an “Articles of Organization” form with the Secretary of State. Every state has its document to fill out and file, so it may be called Certificate of Organization or Certificate of Formation. 
• Another document not required but strongly recommended is the LLC Operating Agreement. Each owner should be involved with the wording and sign the operating agreement that outlines the company’s management structure, investor contributions, profit division, and contingencies, such as what happens to the LLC if a member leaves or dies.
• If you plan on expanding to different states, the LLC needs to appoint a “registered agent.” A registered agent acts as a point of contact for official paperwork for the company. 
• Some states may also require new LLCs to file a “Statement of Information” along with the Articles of Organization. The Statement of Information asks for the company name, partner information, and business address.

Filing fees for LLCs vary by state, and if you have locations in other states, you’ll need to register the LLC in those states, also, and pay fees in each state. Although every state is different, most states require LLCs to file annual notices and pay a fee with the Secretary of State’s office verifying the LLC is still in business and update information about the company and its members. Many states also require LLCs to pay an annual Franchise Tax.

Tax Filing Differences

Besides the LLC’s registration requirements and the LLC’s liability protections, taxes can be reported differently in a partnership vs. an LLC.

In general, LLCs and partnerships are deemed “pass-through” entities for tax reporting purposes. The company’s profits and losses are passed down to the partners’/members’ personal tax returns. The company itself does not pay income tax, and all passed-on profits are subject to self-employment taxes (Medicare and Social Security) and income tax. Similarly, LLC members and GP partners are not considered employees and do not receive paychecks. 

The partnership structure reports company income, deductions, gains, and losses on a Schedule K-1, IRS Form 1065 with the IRS. Then each partner uses the information from the IRS form to report their share of the partnership’s income/loss on each individual tax return.

Likewise, a multi-member LLC is taxed like a partnership by default using IRS Form 1065. However, unlike a partnership, the LLC structure has the option to be taxed as a Subchapter S Corp. The S Corp election allows the LLC members to be treated as employees, so only wages and salaries are subject to self-employment taxes. Then, remaining profits can be allocated as distributions and therefore not subject to Social Security and Medicare taxes. To elect S Corp status with the IRS, LLCs must file IRS Form 2553 by March 15 of the current tax year. If you miss the deadline, the S Corp election won’t go into effect until the following tax year.

Which is Best for Your Business?

Every business is different, and every business owner feels differently about how they want to manage and operate their company. The best advice is to ask yourself and your partners if the liability protections afforded by the LLC are worth the extra fees and paperwork required. Then talk to your accountant and attorney for advice before making a final decision.

CorpNet offers business formations, filings, state tax registrations, and corporate compliance services in all 50 states. Express and 24 hour rush filing services available upon request. Click here to learn more.

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This article, "LLC vs. Partnership: Which is the Better Choice?" was first published on Small Business Trends