See: IRS – Choosing a Business Structure FS-2008-22 Choosing a Business Structure FS-2008-22 7/22/08
An LLC is formed by filing Articles of Organization with the Office of the Secretary of State.
An LLC is very flexible e.g., they can be managed by the members or member or non-member managers.
Operations and governance
An LLC is very flexible and its operations and governance can be very tailored, While there are “default” provisions provided by statute, you should have an operating agreement that provides how the entity will operate.
Tax classification (corporate, partnership or “disregarded entity” / sole proprietorship)
Unless an LLC elects to be treated as a corporation and to pay its own taxes, it is a “flow-through” entity, and the income and expenses “flow through” to the members who report the income and expenses on their individual form 1040 income tax return.
Single member LLCs are “disregarded entities” (ignored for tax purposes), and the member reports the LLC income and expenses on their schedule C.
If there is more than one member, the LLC files a form 1065 (“partnership” return) but does not pay any tax itself, and issues a form K-1 to each of the members, who generally report the income and expenses on schedule E.
An LLC can elect (“check the box”) to elect to be taxed as a corporation, and if it does it can make an S election and be taxes as a “flow through” entity.
Character of income as self-employment income 6/7/09
All income flowing through an LLC that has not elected to be taxed as a corporation is subject to self-employment tax (the equivalent of social security tax on employees). If an LLC elects to be taxed as a corporation and also makes an S election, and provided that the LLC pays “reasonable” compensation to its members, the LLC can make S distributions, which are not subject to self-employment tax.
Disregarded entities must pay employment taxes under it own EIN
Previously, a disregarded entity could pay employment taxes under either its name and own EIN, or the disregarded entity owner’s name and EIN. Now, disregarded entities paying wages on or after January 1, 2009 must have their own tax ID number. The new regulations only apply to employment taxes, and a disregarded entity continues to be disregarded for other Federal tax purposes. Reg. § 301.7701-2(c)(2)(iv). See 72 Fed. Reg. 45,891 (Aug. 16, 2007). 10/30/08
The Ninth Circuit Court of Appeals declined to review arguments not raised before the District Court by the owner of a disregarded single-member LLC fighting personal liability for the entity’s unpaid employment tax liabilities that the IRS’s check-the-box regulations are unreasonable and invalid. The court also found that the recent decision by the IRS to adopt new regulations regarding the taxation of sole member LLCs does not change the result here. Kandi, 06-35209, 2008-2 USTC ¶50,599 (9th Cir, September 25, 2008). 10/30/08
In general LLC members are not liable for LLC debts. However, liability may result to e.g.:
- bank requirements to guaranty debt;
- “veil piercing” due to failure to adequately capitalize the entity or failure of the members to respect the separate existence of the LLC (e.g., treating its funds as their own); or
- direct liability as an action in events apart from being a member (e.g., a project manage directing employees in improper or unsafe actions).
In Stearn & Co., LLC (DC Mich., 6/29/07), the Michigan U.S. District Court held the sole member of an LLC is personally liable for unpaid employment taxes owed by the LLC. The taxpayer did not elect to treat the entity as a corporation under the “check-the-box” regulations so it was therefore treated as a sole proprietorship for federal tax purposes. The court rejected the taxpayer’s argument that the company’s LLC status under state law prevented the IRS from levying against him. 10/10/07
But, see above regulation providing LLC is to pay employment taxes under its own EIN, and consequently the members are liable for the IRC § 6672 trust fund recovery penalty.
Also, the Missouri Department of Revenue (“DOR”) and Missouri Division of Employment Security (“Division”) position is that members of LLCs taxed as partnerships are personally/individually liable for unpaid LLC taxes to be paid or collected by the LLC, i.e., DOR withholding and sales tax, and Division unemployment contributions, without resorting to responsible person personal liability. 6/8/12
Separateness of entity
An LLC needs to act like a separate entity. The LLC’s phone listing, stationery, signs, advertising and other items need to indicate the separate status, and its finances need to be kept separate.
A record book should be maintained, and include originals of the Articles of Organization, Operating Agreement, any amendments, and copies of all loan documents, member approvals, and other material contracts.
Each and every time you sign any note, check or other document on behalf of the LLC, be sure to indicate that you are signing in a representative capacity and not individually. Titles used in LLCs include “Member”, and if applicable, “Managing Member”, “Manager” and “Administrator”. Although not typical, your company may also have officers.
A single member limited liability company that does not have or plan to have employees will use the owner’s social security number as a tax identification number. Single member LLCs that have employees and all multi-member LLCs must apply for a federal tax identification number (“EIN”) on form SS-4.
If you have employees (single or multi-member), withholding and FICA taxes must be reported and paid over on a regular basis, and employment tax deposits made, within the deadlines set by law, and a Division of Employment Security employment experience report must be filed, and returns must be filed and contributions paid if there are non-member employees.
If the company is to sell on a retail level or needs to issue exemption certificates, a state sales tax license is required, and is obtained by filing Missouri form 2643 and posting a cash bond or other deposit.
You should consider the need for liability, health, workers’ compensation and other insurance. It would be best to consult your insurance advisor for competitive quotes.
Duty of professionals
The LLC’s attorneys are limited in their ability to represent the interest of the LLC and its members. It would be a potential conflict of interest for the LLC’s attorney to hold himself out as representing both the company and the individual members. This is especially true if a dispute arises at a later time between the members as to management decisions. I recommend that if a dispute arises between yourselves, you consult or secure the services of an independent attorney.