Once you get your LLC, apply for a federal employer identification number (EIN). Don’t do this until the paperwork finally settles out because a number of issues might emerge that change the application for the EIN. For example, the name you selected for your LLC might already be taken. Once everything is settled, then apply for your EIN using form SS-4. Most entities need an EIN if they pay employment taxes or excise taxes. It is a good idea to apply for an EIN even if you are just a single member LLC with no employees.
Form SS-4 can be filed by mail, fax, or online. If you use the online version, you will receive your EIN instantly. The process is free, but certain information will be required, such as the name of the individual responsible for the business and their tax ID number. If the trade name of your business is different from the legal name, that information must be entered on the SS-4.
When you fill out the form, you will be asked many questions including what type of entity you are, such as a sole proprietor, corporation, partnership, or other. Make sure you choose the right entity type, and make sure you keep a copy of the SS-4 as long as you are in business. If there is ever any doubt about what type of tax form you need to file your first business year, refer to the SS-4.
Making the election
If you are a single member LLC, you could be taxed as a sole proprietorship or an S corporation. If you want to be an S corporation for taxation purposes, then you must convert your LLC by filing IRS Form 2553, election by a small business corporation. The form is free to file as long as you choose to use a calendar year for your business instead of a fiscal year; otherwise it could cost $6,200. All members of your LLC must consent to the election at the time of filing and sign the form. The LLC must meet the requirements for an S corporation, having only one class of stock and no more than 100 shareholders. The shareholders can’t be partnerships, corporations, or nonresident aliens.
This is an area where many taxpayers mess up. They forget to file Form 2553 within 75 days of formation. If you don’t file the form by the deadline, your business will not receive S corporation status until the following tax year. If you do file the form, the service center will notify your corporation if the election is accepted and when it will take effect (usually within 60 days of filing the application). Again, this is paperwork you should keep in your files indefinitely.
What happens if you forgot to file Form 2553? In many cases, taxpayers qualify for late election relief. Talk to your tax preparer about what documents need to be submitted to get relief and they can advise you of the best strategy to pursue.
When a multi-member LLC is formed, then they will file a 1065 partnership return and the LLC is a pass-through entity. Unlike partnerships, LLCs are required to file an article of organization with a secretary of state office. A general partnership, on the other hand, can be created on the basis of a verbal agreement — they lack the formality of an LLC. Also, another difference is that partnerships are jointly and severely liable for the debts of the partnership, meaning that a creditor can choose which, or all, partners to collect from.
Spouse situations
Multimember LLCs must report their share of income and losses on their personal tax return, file the 1065, and issue schedule K-1s. The one exception sometimes occurs when a husband and wife are both members of the LLC. An unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. At the end of 2006, the Small Business and Work Opportunity Tax Act provided that a qualified joint venture whose only members are a married couple filing a joint return can elect not to be treated as a partnership for federal tax purposes. Under this exception, the married couple saves the expense and time of filing a Form 1065, and they get the added advantage of both receiving credit for Social Security and Medicare coverage.
To get this treatment, both spouses must share items of income, gain, loss, and so forth; they must file a joint return; both must materially participate in the trade or business; and they both must elect not to be treated as a partnership. Only businesses not operated in the name of a state entity, including LLCs, qualify for this joint venture treatment. A business owned and operated by the spouses through an LLC does not qualify. The husband and wife must file separate Schedule F and SEs (if required) and conduct the business as sole proprietors.
If the LLC is formed in one of the nine community property states, the laws are different. The husband and wife LLC has two options: be taxed normally as a partnership or be taxed as a qualified joint venture LLC. The second choice saves a lot of paperwork and expense.
This brings us to the massive penalties that can be assessed against business tax returns and why you should get those returns filed as soon as possible.
If you are late filing your partnership return and fail to file for an extension, the penalty is $220 for each month or part of a month the failure continues (maximum of 23 months), multiplied by the total number of partners in the partnership during any part of the partnership’s tax year for which the return is due. Ouch! The only time a partnership does not have to file a tax return is if it neither recieves gross income nor pays or incurs any amount treated as a deduction or credit for federal income tax purposes. Most of the time, partnerships have to file. If you don’t want angry partners, make sure the paperwork gets done and return extensions are accepted.
It is mandatory for all corporations to file annual tax returns, even if the business was inactive or did not receive income. This is another penalty trap for S corporations just getting their businesses off the ground. Failure-to-file penalties for S corporations are also steep. The penalty is $235 for each month the return is late (up to 12 months) times the number of shareholders during any part of the corporation’s tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late to a maximum of 25% of the unpaid tax.
To avoid these scenarios, work closely with a trusted financial team. Ask your dairy neighbors whom they might recommend to do tax work. Usually word gets around fast on who is dependable and who to avoid.
DECEMBER 2024 ISSUE:
* Successful dairies are built on strong leadership
• Plan for partnership tax prep
• Aim for intermediate
