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Business CPA & Limited Liability Company (LLC) Advice

Limited Liability Company (LLC) Advice

Clients often ask about limited liability company (LLC) which is a hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

As a Business CPA, I don’t recommend them for the average small business. The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations, other LLC, and even other entities. As a CPA I have seen clients devastated with their tax bill as a result of having picked an LLC structure

Unlike shareholders in a corporation, LLC are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC, according to VieraCPA a CPA Firm. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

CPA Firm & Forming an LLC

CPA’s note that while each state has slight variations to forming an LLC, they all adhere to some general principles:

Choose a Business Name. There are 3 rules that your LLC name needs to follow: (1) it must be different from an existing LLC in your state, (2) it must indicate that it’s an LLC (such as “LLC” or Limited Company”) and (3) it must not include words restricted by your state (such as “bank” and insurance”). Your Small Business CPA can register your name with your state when you register your business, so you do not have to go through a separate process. Read more here about choosing a business name.

A small CPA Firm or Attorney usually files the Articles of Organization. The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members. The form is provided by and filed with your state’s LLC office. For most states, you file with the Secretary of State. However, other states may require that file with a different office such as the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code.

Create an Operating Agreement. Business CPA will most often defer to an attorney for the creation of operating agreements which are required by most states and are not filed at your state office. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. Percentage of interests, allocation of profits and losses, member’s rights and responsibilities, and other provisions are usually included here and required by your small Business CPA for tax preparation.

Obtain Licenses and Permits. Once your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool to find a listing of federal, state and local permits, licenses, and registrations you’ll need to run a business.

In the eyes of the federal government, an LLC is not a separate tax entity, and therefore the business itself is not taxed. Instead, all federal income taxes are passed on to the members of the LLC and are paid through their personal income tax. While the federal government does not tax income on an LLC, some states do, so check with your Business CPA.

Small Business CPA note that since the federal government does not recognize LLC as a business entity for taxation purposes, all LLCs must file as a corporation, partnership, or sole proprietorship. Certain LLCs are automatically classified and taxed as a corporation by federal tax law.

Small CPA Firm note that LLCs that are not automatically classified as a corporation can choose their business entity classification. To elect a classification, an LLC must file Form 8832. This form is also used if an LLC wishes to change their classification status. Read more about filing as a corporation or partnership and filing as a single member LLC at IRS.gov.

The following tax forms should be filed depending on your classification:

  • Single Member LLC. A single-member LLC files Form 1040 Schedule C like a sole proprietor.
  • Partners in an LLC. Partners in an LLC file a Form 1065 partnership tax return like owners in a traditional partnership.
  • LLC filing as a Corporation. An LLC designated as a corporation files Form 1120, the corporation income tax return

Business CPA can guide you through Limited Liability Companies relevant tax forms and additional information regarding their purpose and use.

Small Business CPA & Combining the Benefits of an LLC with an S-Corp

There is always the possibility of requesting S-Corp status for your LLC. A small business attorney can advise you on the pros and cons. You’ll have to make a special election with the IRS to have the LLC taxed as an S-Corp using Form 2553. This must be filed prior to the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. For more information about S-Corp status, visit IRS.gov or read Should My Company be an LLC, an S-Corp or Both?.

The LLC remains a limited liability company from a legal standpoint but for tax purposes can be treated as an S-Corp. Be sure to contact the state’s income tax agency where the election form will be filed. Ask them whether or not they recognize elections of other entities such as the S-Corp and what the tax requirements are.

 Advantages of an LLC

Limited Liability. Members are protected from personally liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members are not required to satisfy the claims with their personal assets. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability – members are not necessarily shielded from their or their employees’ tort actions, such as accidents.

Less Recordkeeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.

Sharing of Profits. There are also fewer restrictions on profit-sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.

Disadvantages of an LLC

Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business out. The remaining members can decide if they want to start a new LLC, or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC, should a member decide to leave the business.

Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and social security. The entire net income of the LLC is subject to this tax.

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Business Trends

Miami CPA Analysis of Foreign Business Selling into U.S. Should You Incorporate?

Do you run an overseas business? Thinking of expanding and selling into the U.S. market? Miami CPA assesses pros and cons and the answer comes down to the physical presence test.

Because U.S. residency or citizenship is not required, non-U.S. citizens can readily sell into the U.S. However, many overseas business owners aren’t clear on whether they are required to incorporate in the U.S. and the associated tax implications according to Miami CPA Gustavo A Viera..

Miami CPA list of what you need to know:

Should I Incorporate My Business in the U.S.?

This is a question that comes up frequently at our Miami CPA Firm given the size of out international practice. And there’s not a clear-cut answer for all businesses. But physical presence in the U.S. is a key indicator.

Essentially, if your intent is to sell goods into the U.S.—whether online or through U.S. partners such as a wholesaler—you may not have to file for incorporation in the U.S. However, if you plan to have a physical presence in the U.S. (such as an office or employees), then incorporation, whether as a corporation or limited liability company (LLC), is worth considering. Likewise, for online businesses in particular, remember that many U.S. consumers feel more confident buying from a registered U.S. business, so that’s another important factor to weigh up. Miami CPA Viera emphasizes this is a commercial reason, not a tax one.

Each business is different and it’s important to look at incorporation in the context of your overall business goals, state incorporation laws, taxation considerations, as well as your ability to scale and manage that legal entity from overseas.

To understand the factors that might impact your decision, book some time with a good U.S. business attorney who understands both international and U.S. law.

How to Incorporate a Foreign Business in the U.S.

Once you’ve made the decision to incorporate, you’ll need to understand the process.

In the U.S., business incorporation occurs at the state level for all business owners, regardless of whether you are a citizen or a foreign national.

The process will vary from state-to-state, but generally involves two steps: applying to register in that particular state, and establishing a registered agent with a valid address in that state (no P.O. Box numbers). A registered agent can be either the business owner or another person who is authorized to receive legal papers on behalf of the business, such as an attorney or Miami CPA.

What Business Structure Should I Choose?

The most popular choice of business structure for non-U.S. citizens is to form an LLC, although you can also legally form and own shares in a C corporation. Non-U.S. citizens cannot retain shares in an S corporation because business income is reported on personal U.S. income tax returns.

To learn more about choosing the right business structure and how to file for incorporation, check out Miami CPA Business Structure guide. This blog offers more insight: Top 10 Questions About Small Business Incorporation Answered.

Which State Should I Incorporate In?

If most of your clients are concentrated in a specific state or you have an office or physical presence in a state, it may make sense to incorporate there. If you don’t plan on having a physical presence in the U.S., you can form a corporation or LLC in states such as Nevada and Delaware, both of which are considered friendly to foreign companies.

If you operate in more than one state, you can elect to incorporate in any of these states. However, you are required to register your business in the other states in which you operate; this process is called foreign qualification and you can apply for it with the help of a lawyer or online incorporation service. Again, for the best advice, consult a U.S. business attorney who has expertise in both U.S. and international law.

Do I Need to Pay U.S. Taxes?

If you are a non-resident business owner, the U.S. Internal Revenue Service (IRS) will tax you on income that is sourced in the U.S. If your business is incorporated in the U.S., you may also be required to pay an annual fee to the state where your business is incorporated.

The IRS offers a guide specifically on International Business, but if you are still left with more questions, it is always good to check with a qualified attorney or accountant.

U.S. citizens will likely need an Employment Identification Number to start up, a process that requires their social security number (SSN). In the case of foreign businesses, an Individual Taxpayer Identification Number (ITIN) will suffice. The IRS issues these 9-digit tax processing numbers to individuals who are required to pay US taxes but who are ineligible for a SSN, including resident and non-resident aliens and foreign nationals.