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If you have been researching corporations or LLCs, you’ve surely heard that forming your entity in states
like Delaware, Nevada and Wyoming can offer you various benefits and beyond what your state can offer
you. Jennifer Reuting will answer your questions here.
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| Q: I am thinking about a one-person consulting business. Your book says that single member LLC are bad, because the IRS views them a sole proprietor, but a CPA that I know says that the state of Texas still recognizes them as entities for legal purposes, why is this bad?
the cpa also says that a sole proprietor can get the "same" liability protection with a business liability insurance policy. Why do I want to go to the trouble of forming a LLC? | |
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| A: Your CPA is correct in that the state of Texas recognizes Single-Member LLCs as entities, however he isn't giving you the entire picture. When it comes to the federal government - more specifically, the IRS - Single-Member LLCs are not-recognized as partnerships. For tax purposes, the IRS considers them "disregarded entities". This doesn't mean much as far as your tax bill goes - the differences are minimal. However, the reasons I am not so keen on Single-Member LLCs aren't due to the tax implications, it's more the legal issues...
As far as I know, there is no specific law in Texas which states that in the event of a lawsuit Single-Member LLCs are to be considered disregarded entites or sole-proprietorships (as the IRS has resigned them to) however, in my opinion, there is not enough case law to substantiate that they are to be offered the same liability protections as standard LLCs either - especially when it comes to the charging order protections that LLCs provide. After all, charging order protections were set up to protect the other partners in the business and if if there are no other partners then… well, you get the picture.
As for insurance policies, I hate it when advisors advise that this is the be all and end all of asset protection. While insurance policies are prudent, the truth of the matter is that when the time comes very few insurance companies want to actually pay out. They have lists of exclusionary circumstances which compete with the size of the "For Dummies" book you're reading. In my opinion, giving a trusted friend or relative one or two percent of your membership shares is the best insurance policy you can buy, but, that's just my opinion. ;-) | |
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| Q: My business partner and I wish to elect for a member-managed LLC. I am slightly unsure how to proceed with finalizing my operating agreement taken from your book, however, as the language states that "the Company shall be managed by one or more appointed Managers." As I scale the size of my operation over the next several years, I expect to hire employees to manage functional departments (e.g. marketing, sales, engineering, etc.). How are these functional managers different from "Managers" as stated in the operating agreement template?
Thanks
David | |
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| A: Really great questions! The sample Operating Agreement I included is just supposed to serve as a template. If you wish to tailor it to your member-managed company then you need to go through and make sure that the document is congruent in reference to being "member-managed" (as opposed to "manager-managed"). In the provision you specified, you can replace it with something along the lines of the following:
"The Voting Members shall manage the Company. In their capacity as Managers, they shall have the right to make decisions and vope upon all matters as specified in this Agreement in proportion to their respective ownership percentage of the company. Voting members need not identify whether or not they are acting as a Member or Manager when they take action."
"Non-voting Members have no right to participate in the management of the Company, nor vote on any matters of the Company. No Non-voting Member shall take any action or enter into any contract or obligation on behalf of the Company without the prior written consent of all of the Voting Members. Likewise, no Non-voting Member shall perform any act that is in any way pertaining to the Company or its assets."
Now, in regards to your employees, the question you need to ask yourself is whether or not you and your partner want to comply with the above statement. If you wish to give your employees full managerial powers then you may be better off being Manager-Managed and assigning your various employees as managers along with yourselves, or if you are set on your LLC being Member-Managed, then you can allow for specific contractual exceptions which you can outline in your Operating Agreement. One of the great things about LLCs is that they are very versatile. You have a lot of room to maneuver, just make sure it is explicitly and contractually stated and understood by all.
Hope this answers your question! | |
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| Q: Does the IRS tax you on the actual cash distributions received or your member allocations? I am forming an LLC, and I want to retain 51% voting rights while my partner will have 49%. I want to distribute the profits evenly to him, myself and a third-party developer at 33% with special allocations. We are building an online software application and have virtually no money to pay the developer and don't want to dole out ownership shares. Thanks, David | |
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| A: If this is the case, I wouldn't even take ownership into account. I would issue your programmer a Profit Sharing Agreement which gives a specific definition of the profits being shared (i.e. if it is "net" profits, then what will be deducted) and pay him as an independent contractor. This will be tax-deductible to your company and you can then share the remaining profits with your partner according to your ownership percentage.
Having a software company myself, this is how I've done it in the past. I would also avoid locking anyone in for the future. The best way to do this is to create benchmarks for productivity and issue profit-sharing "points" once those benchmarks are reached. That way, if the programmer doesn't live up to his or her end of the bargain, you aren't required to involve them in any more profit-participation than you've already obligated yourself to and you can find someone else to fill the spot. ;-)
Also, to answer your first question, if your LLC is subject to partnership taxation (it sounds like it is) then the IRS will tax you on the allocations, not the actual cash distributions, however, varying the allocations is not as easy as it sounds and best to be avoided if possible. The above scenario I outlined for you should be sufficient. | |
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| Q: I have an LLC in Missouri. Can I move it to Florida or Delaware? If so, are there tax advantages? | |
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| A: If your LLC is subject to pass-through taxation, then domiciling (or re-domiciling, in your case) will be of no benefit to you. With pass-through taxation, your company profits are allocated to the partners then paid as personal income to the state or states in which you and your partners live.
As for Delaware, there are some tax benefits to domiciling your company in that state, however the annual fees there are a bit high now for LLCs ($200) and their laws in my opinion are structured more for public companies or those that wish to go public sometime in the future. Nevada's laws are more geared toward the small business owner or those who appreciate privacy and it is, for the most part, a tax-free state. Wyoming is a close runner-up. Florida is also a good choice since there are no franchise fees in the State of Florida. A lot of factors come into play when you are choosing to utilize a tax-haven in your corporate structure. I recommend reading Chapter 5 of the book for a more in-depth approach to this.
Also, it should be said that if you are looking to move an existing business to a tax haven then you might want to consider forming a new entity rather than redomiciling. It's the best way to keep everything clearly delineated and, assuming your LLC has pass-through taxation, transferring your business assets from one entity to the another is not a taxable event. The exception to this would be if you chose wanted to preserve your original incorporation date, keep credit lines, bank accounts, etc. which would all be understandable reasons. | |
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| Q: Do all managers names and address need to be on the articles of Incorporation or just the registered agent. In addition why is it better to have a registered agent outside the LLC | |
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| A: Depending on the state, you will generally have to state whether or not your LLC is manager-managed or member-managed and will have to list either the initial manager or member (respectively) in the Articles of Organization. Keep in mind though that this information can easily be changed later on.
As for the second question… I get asked about this ALL the time. Your registered agent is where all of your company's service of process and state filings will be sent. Generally, registered agents have very specific state-imposed responsibilities such as the "regular business hours" they need to maintain and strict record-keeping requirements. If you don't comply with these then you could face serious repercussions. For example, if you decide to go on a business trip and there is no one at your office during the required business hours to receive service of process then you could theoretically lose the lawsuit by default and spend thousands getting a judgment reversed assuming you can get it reversed at all! Additionally, a good registered agent will make sure you stay current on your state filings and forward government related mail to you.
MyLLC.com only charges $99 per year for registered agent service and, in my opinion, the cost is well worth the peace of mind whether you use MyLLC.com or someone else! If you're interested in reading more about Registered Agents, check out my Google Knol on the subject at: http://knol.google.com/k/jennifer-reuting/registered-agents/ | |
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| Q: Can I get a LLC if I am a convicted felon? | |
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| A: This is such a good question, I'm going to answer it in the next edition of the book as well. Thank you! I’ve had clients in this same position and the good news is that being a felon doesn’t disqualify you from owning your own business or entity, but the bad news is that there might be restrictions on what kind of business you can (legally) operate. For example: if you are thinking of opening a casino you would not be able to obtain a gaming license. If your offense was a sex offense it is unlikely that you would be able to obtain a license to operate a day care, etc. These are a couple of examples – and extreme ones to be sure, however I just wanted you to understand where I am coming from on this.
The best thing to do I think would be to contact either the Secretary of State in your state, your local business license department (if you have one), or even possibly the police department in your area. Call anonymously if you are uncomfortable - and ask if there are any restrictions on you operating a (insert business type) business in your state if you are a felon – and you might even specify your conviction. There might even be a review board who considers your licensing and if your felony is something minor – like a 10 year old bad check conviction when you were 17 or something, I would hope that this would be taken into consideration if you were applying to open an auto repair business.
I don't know the circumstances that led to you being a felon, however I absolutely applaud you for wanting to make things better through entreprenuership! | |
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| Q: I am a resident of California. I am interested in purchasing a motorhome out of state (AZ). I have been told by the dealer that I should form an LLC to avoid sales tax. I plan on taking the motorhome back to CA. Does California recognize an out of state LLC? Would there be any problems in registration/taxes/fines should I remain in CA. with the vehicle and resale in the future? Thanks for your assistance, Ron | |
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| A: Hi Ron, yes it is true! There are certain jurisdictions such as Montana where there are a strangely disproportionate number of motorhomes registered. I'm not sure about Arizona, but using Montana as an example, a Montana LLC is considered a Montana resident, and like any other resident of Montana does not have to pay sales tax on any purchase. Essentially, you aren't buying the motor home, your Montana LLC is! Depending on your state's sales tax rate, you can legally save $25,000 or more on your motorhome purchase not to mention lower registration fees than many other states.
There are companies that specialize in exactly this type of transaction. This seems like solid advice you've received from the dealer for now. As for future problems, I wish I could tell you, but my crystal ball is broken. ;-) | |
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| Q: I sell on ebay worldwide...from North Carolina...I plan to net approximately $15,000 profit or more. Would it be better for me to set up a single-member LLC in Wyoming. How would I go about paying taxes....regarding state taxes in NC...would I need to register the business in NC as well? And I assume no need to pay self employment tax? My personal tax liablility would be that which I pay myself out of the LLC right? How is the LLC taxed? Do I need to do quarterly estimated taxes? I don't think North Carolina allows single-member LLC...and perhaps the best location is Wyoming since I do not have a brick and mortar....Your advice is kindly appreciated. | |
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| A: Great question! Unless you elect “corporate” taxation for your LLC, you will be stuck with a pass-through taxation where all of the profits and losses flow through to your personal tax return. In the case of pass-through taxation, you will not gain any state tax benefits from an LLC – after all, your profits will just flow to your personal tax return and, along with your other income, you will be required to pay NC state taxes.
The only way to truly derive tax haven benefits with an LLC is to elect “corporate taxation”. This will keep all of your business income in the state in which your company is formed (in your case, Wyoming). Just keep in mind that electing corporate taxation has some drawbacks, including double-taxation of profits. I advise you to seek out more information about this sort of taxation by either reading the book or speaking with your tax advisor.
Best of luck! | |
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| Q: Hi,
I am currently reading your book. It is really a great resource. Thank you!
I have already formed my LLC and I am creating my company's identity right now. Should I always include "LLC" with the name? For example, is it OK to have just the company name (and logo) on a business card?
Simply put:
Should the business card read "Name of Company, LLC" or can it just read "Name of Company"?
Thank you again. Cheers - Matthew | |
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| A: Generally want to use “, LLC” on your name. It tends to add a bit of legitimacy to your company - after all, would you rather do business with "Bob's Discount Plumbing" or "Bob's Discount Plumbing, LLC" ??? – Another advantage is that it makes it known to anyone contemplating suing they will probably have a difficult time getting at your personal assets since you've taken the important step of forming an LLC! An exception might be in cases where it may get in the way of branding (Google would not sound so good branded as Google, LLC!). One thing to remember is that if you're filed with "LLC" on your name and you decide that you want to omit it, you may have to file a DBA (also known as a "fictitious firm name") in the states where you are doing business. | |
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| Q: After reading your book, I decided a series LLC is the way to go. Do you have or can you point me to the series Operating Agreement, Separate Series Agreement, and addendum to the Operating Agreement used to form a new series? I did not find templates of these forms on the CD. Thanks. | |
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| A: At this early stage in the life of Series LLCs, it is very difficult to determine how each state (or the IRS for that matter) is going to treat them. It was a difficult decision, but we decided that rather than allow people to put themselves in very procarious circumstances, to wait a bit until the dust clears before providing forms for the Series LLCs and the "cells" that go in them. If your heart is set on the Series LLC, my recommendation is that you consult an attorney familiar with the laws of the state in which you're forming it. While there are many firms that can assist you, MyLLC.com would be happy to help you with forming a Series LLC in Nevada through our affiliate there who has a paralegal specializing in these entities. If you wish to speak with her, just call the MyLLC.com offices and let them know that you'd like to speak with Ann, the paralegal in Las Vegas - and they will arrange it for you! | |
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| Q: Hi there, I was hoping you could help me with this... I am currently at the stage of registering my LLC and when getting my FEIN number (online), I was not allowed to put a ".com" on my business name. I want to register my business in NJ as a ".com". Can I still do that if the IRS thinks I'm a "COM" and not a ".COM"? I don't want any discrepancies. Thank you! - Darryl | |
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| A: Isn’t that annoying? The IRS doesn’t allow punctuation in their online applications, which is why you aren’t allowed to put a period in your “.com”. Other than defense, government agencies are not really known for keeping up with technology. My advice is that you simply replace the period with a space when completing the application. The state of New Jersey will understand the discrepancy. | |
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| Q: I read your book. Does the double liability protection also include the state of Maine? | |
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| A: Yes. LLCs for the most part have the same basic structure in all 50 states and DC. | |
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| Q: In the book you mention to create a corporation in a tax-free state to create an LLC partnership, what type of corporation is best for that, an S Corporation? | |
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| A: If you are looking to save on taxes by utilizing a tax haven such as Nevada or Wyoming, then you should use a c-corporation. Otherwise, if you were to do an s-corporation, the profits will flow directly to you and you will end up paying personal taxes according to the tax rate in the state you live in. I hope this helps you! | |
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| Q: In general, is there a relationship between forming an LLC and the need to obtain a business license? Does one get a business license in the state where the LLC will live? | |
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| A: This is a difficult question and the best answer is that there is no static answer. Whether or not a business is required to obtain a business license can depend on the specific jurisdiction in which the entity is filed or does business in as well as the type of business being conducted as well as other factors (# of employees, gross income, etc.).
In some states, counties, or cities, you may be required to obtain a business license even if you are only a sole-proprietor without a corporation or LLC. Sometimes one county in the a state will require a license and another one will not.
I wish i could provide a more specific answer for you, but there are literally thousands of possible licenses in different jurisdictions. Additionally, often there are a myriad of different exemptions for certain businesses or industries, for example some jurisdictions do not require film production companies to obtain business licenses as an incentive to promote filming in their jurisdictions.
I'm sorry I can't provide a more specific answer that would be under 10,000 pages. The best way to get the answer to your question is to contact the local tax authority in the jurisdiction where you conduct business and ask them what the licensing requirements are for your type of business! | |
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| Q: I bought your book and have formed my own LLC using it. I am using Quicken 2008 Home and Small Business and have tried to find a book to help explain posting and reimbursement of personal expenses. Can you recommend a book? | |
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| A: Unfortunately, to my knowledge there aren't any great books on business taxes as most business owners just use accountants. It is for this reason that I am currently encouraging Wiley to do a "Business Taxes for Dummies". ;-) In the meantime, if you have a specific question, I may be able to help you out. | |
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| Q: In your book you talk about the advantage of
forming your LLC, if you're an internet based business, in another state such as Nevada due to the "no personal income".
I'm slightly confused about how this exactly works. As far as I understand it, LLCs are taxed as pass through so any e-taxable profits are assigned to the owners as personal income.
So if I live in Virginia but my LLC is formed in Nevada, how would this exactly work? Wouldn't the earnings from the LLC get passed through to me, living in VA, and then I have to pay the taxes in VA? If so, how exactly would the no taxes in Nevada help me save some money?
Thank you for your time.
I know it's kind of a long question but, as I'm sure you know, trying to figure out and decide what business to form, and where, is kind of nerve racking. Your book has been a great help, I'm just confused by this one point. | |
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| A: Great question! You are right that the profits would pass on to you and you would end up paying Virginia taxes anyway... unless you have elected corporate taxation. Your LLC is not required to have pass-through taxation and by electing corporate taxation, you are allowed to keep your profits in the LLC. The profits you keep in the LLC will be taxed at the federal corporate tax rate. In addition, you will also be required to pay state taxes. However, by forming your LLC in a tax-free state (such as Nevada), you can eliminate any possibility of state taxes being assessed on the profits you keep in your company.
I hope this answers your question... If you need help in forming your LLC or electing a tax status, please don't hesitate to contact me or my associates at MyLLC.com! | |
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| Q: You mentioned in dummies that you are against single member LLC's and suggest getting a friend to be a member with a small share. You do not mention family members as additional LLC members to get around the liability hole. Please explain. | |
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| A: Family members are okay to take on as partners, however spouses generally do not count. If an LLC is held entirely by a married couple, it is still generally considered a single-member LLC. This is specifically true in California where this has been tested. | |
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