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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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Tax

Small Business CPA Top Ten Tips on a Tax Credits

Small Business CPA Top Ten Tips on a Tax Credits

Small Business CPA Gustavo A Viera remind that If you paid someone to care for your child, spouse, or dependent last year, you may qualify to claim the Child and Dependent Care Credit when you file your federal income tax return, according to Small Business CPA across the country. Below are 10 things the Small Business CPA Viera wants you to know about claiming the credit for child and dependent care expenses.

Small Business CPA Licensed CPA Tips

1. The care must have been provided for one or more qualifying persons, according to Small Business CPA. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

2. Small Business CPA everywhere remind you the care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

3. You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment states Small Business CPA Gustavo Viera. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.

4. The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return prepared by your local Small Business CPA.

5. Licensed Small Business CPA remind you that your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

6. The qualifying person must have lived with you for more than half of 2011, according to Small Business CPA Gustavo Viera. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents. See Publication 503, Child and Dependent Care Expenses.

7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

8. For 2011, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit, according to Small Business CPA. The qualifying expenses must be reduced by the amount of any dependent

9. Care benefits provided by your employer that you deduct or exclude from your income, such as a flexible spending account for daycare expenses.

10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax. See Publication 926, Household Employer’s Tax Guide.

Small Business CPA owner and a Licensed CPA Gustavo Viera

Categories
Tax

Small Business CPA Warns of IRS SWAT Teams for Tax Dodgers

Small Business CPA Warns of IRS SWAT Teams for Tax Dodgers

Small Business CPA Gustavo A Viera warns Tax Dodgers that the Internal Revenue Service is staffing up with high-powered talent to crack down on companies shifting profits from country to country to lower their tax bills, a hot strategy the agency has targeted before with only limited success.

Small Business CPA Viera points out the IRS showed its elevated concern on the issue, known as “transfer pricing,” last May by hiring Samuel Maruca to fill the newly created post of transfer pricing director.

He has since brought aboard specialists from Big Four audit firms KPMG and Ernst & Young, as well as law firm Mayer Brown and boutique consultancy Horst Frisch, Small Business CPA Viera adds.

Maruca, who came from law firm Covington & Burling, is still recruiting. He told Reuters the agency previously had “had a difficult time attracting and retaining economists.”

Now, he said, the IRS’s international group “has significant external hiring authority.”

Small Business CPA VieraCPA points out that transfer pricing is a booming field of global tax law. It involves multinational corporations that are constantly moving goods, services and assets from one subsidiary to another in different countries, and how they account for these “transfers.”

Small Business CPA Viera points out that by carefully manipulating the pricing of such moves, companies can effectively shift profits to low-tax countries from high-tax ones, lowering their overall tax costs.

Many governments in the developing and developed world, faced with crushing deficits, are working to curb transfer pricing because it reduces their corporate tax revenues.

IRS Commissioner Doug Shulman made changes at the agency in mid-2010 that set the stage for bringing in Maruca, who has filled 40 positions so far and plans to bring on up to 60 more staffers.

The IRS, which employs 90,000 people, saw its budget cut by 2.5 percent by Congress for fiscal 2012 to $11.8 billion.

Small Business CPA Underpaid and Out-gunned

Federal agencies often struggle to keep up with higher-paid private-sector professional Small Business CPA. The IRS is no exception, and there is some skepticism about Maruca’s chances.

“The economic crisis allowed the IRS to attract talented, experienced industry professionals who might not have been available previously,” said ex-deputy IRS commissioner Michael Dolan, now director of KPMG’s Washington national tax practice.

“The $64,000 question is, what will Maruca be able to do … and will he really have enough resources to change the game?” Dolan said.

Small Business CPA VieraCPA notes that in order to curtail tax avoidance through transfer pricing, governments seek to limit corporations’ ability to manipulate the transfer prices. National laws, though variable from country to country, generally call for “arms-length” pricing.

Small Business CPA Viera says in theory, that means corporations must set transfer prices that are at or near market level, not artificially raised or lowered. But enforcement is complex, especially for intangible assets, such as search-engine algorithms or trademarks.

“There are billion-dollar disputes on just the arms-length transfer pricing of intangibles” said Small Business CPA Viera.

IRS Lags

By one measure of transfer pricing enforcement, the IRS lags behind tax treaty partners. In fiscal 2011, 85 percent of transfer pricing audit adjustments were initiated by a foreign country, rather than by the IRS, according to IRS statistics. That was up from 77 percent in fiscal 2010.

Two major transfer pricing court decisions went against the IRS in 2009 and 2010.

“Clearly, the IRS is trying to figure out what to do next on its litigation strategy in these important transfer pricing cases,” said Viera, a managing partner of a Small Business CPA in Miami who called Maruca’s group a “SWAT team.”

As the IRS raises its game, the pharmaceutical and high-tech sectors can expect close scrutiny, Small Business CPA professionals said.

Businesses are sure to fight back. The IRS has ruffled feathers on transfer pricing before with limited results.

“Anybody who thinks the IRS can ultimately enforce transfer pricing is either an eternal optimist or delusional,” said Richard Harvey, a tax professor at Villanova University and former senior adviser to the IRS’s Shulman.

The staff changes and hiring at IRS “will help them on the margins,” Harvey said. “But they’re still fighting a very difficult battle where the deck is stacked against them.”