What You Need To Know About Limited Liability Companies (LLC) and Employer Identification Numbers (EIN)

By Jessica Suotmaa 0

In December 2017, the Internal Revenue Service (IRS) introduced updates regarding the issuance of Employer Identification Numbers (EIN), or Tax Identification Number (TIN), to Limited Liability Companies (LLC). The rule went into effect in January 2018, however, since the IRS typically offers taxpayers a grace period to transition to the new regulation, the IRS will begin enforcing said changes in May 2019.  In this article, we will explain the upcoming changes and how they may affect your application for an EIN.

Husband and Wife Owned LLC

By default, the IRS treats Single-member LLCs as disregarded entities. This means your single-member LLC will be taxed as a sole-proprietorship.

In California, and other community property states, the IRS considers a husband and wife “partnership” a single-member LLC, or disregarded entity. This means that a husband and wife LLC “are not eligible to be qualified joint ventures“.

LLCs formed by husband and wife in non-community property states should apply for an EIN as a partnership.

Single-Member LLC with No Employees

Since a single-member LLC is tied to your social security number, the LLC does not require an EIN. The exception is if you have employees or if you are required to pay excise taxes.

To file taxes for your single-member LLC, you must use your Social Security Number (SSN) or TIN, and file a Schedule C, Profit and Loss from Business, with your Form 1040, Individual Tax Return.

To fill out a Form W4, Employee’s Withholding Certificate, or Form W9, Request for Taxpayer Identification Number and Certification, for your LLC, you can also use your individual SSN or TIN.

LLCs and Responsible Party

The responsible party in an EIN application is not just the person who signs the application.  Rather, the Responsible Party is the person who can make changes to the entity with the IRS, and the person the IRS contacts regarding matters related to the EIN or LLC.

While the Responsible Party should be the person who has control over the LLC and its assets, it does not have to be the only person who has that power.  It is important to know that you can only select one Responsible Party for the purposes of federal taxation. You can change the responsible party of an EIN using Form 8822-B, Change of Address or Responsible Party for Business Entities.

If you are forming a single-member LLC, you must be the Responsible Party for that EIN. You would include your social security number on the Form SS-4, Application for Employer Identification Number, and check box “Other” while writing in “Disregarded Entity”.

If you are forming a multi-member LLC, you must choose a member of that LLC to be the Responsible Party. Since multi-member LLCs are taxed as partnerships by default (Form 1065), the Responsible Party should be a “partner” in the partnership.

Who Can Be a Responsible Party?

Where previously you could form an LLC using another entity and EIN as the Responsible Party, now you can no longer do so.  The Responsible Party must be a “natural person”, not a corporation or any other entity.

The new requirement means that any LLC seeking an EIN must apply using an SSN or Individual Taxpayer Identification Number (ITIN) belonging to the Responsible Party.

If the LLC is owned by another entity, e.g., “parent company”, the Responsible Party of the parent company entity must be listed as the Responsible Party of the LLC in the EIN application.

Foreign Individuals with no ITIN or SSN

If you’re not a U.S. citizen or Permanent Resident and have no ITIN or the need for an ITIN, you can still apply for an EIN for your LLC.  When you fill out the SS-4 application, be sure to write “Foreign” on the line requesting a TIN.

 

Do you have further questions on obtaining an EIN for your LLC? Contact us for additional assistance.

Top 3 Differences Between a Sole Proprietorship and a Single-Member LLC

By Jessica Suotmaa 0

If you’re a one-man (or woman) business, you might wonder whether you should continue operating as a “sole proprietor”, or register as a single-member Limited Liability Company (LLC). Since both business entity types are for a single owner, we will cover the top three items you should consider in deciding between sole proprietorship and single-member LLCs.

1. Costs

Sole Proprietor: The cheapest way to start a business is to “be” the business as the owner of a sole proprietorship.  You could obtain an Employer Identification Number (EIN) for free (for banking, payroll, and tax purposes).  As a sole proprietor,  your name is your business. However, if you want to “do business as” another name, you can obtain a fictitious business name for a fee through your county.  You would not have to register your “company” officially through any channel or pay any maintenance fees.

Single-member LLC: This is not the case with a LLC.  To register an LLC with your local State, you would have to pay registration fees and file Articles of Organization.  Depending on your organization, you will also have to file annual Statements of Information (for a fee). In California, an LLC pays a minimum tax of $800 a year.

2.Taxation

Sole Proprietor: As a sole proprietor you would report your income and losses on your personal tax return with Schedule C and itemize when necessary.

Single-member LLC: Since LLCs are not federally recognized as separate entities, LLCs are taxed as one of the other entities: disregarded single-member LLC (sole proprietorship), partnership (if more than two members), or corporation. As a single-member LLC, you cannot elect to be taxed as a partnership, but you can choose between sole proprietorship and corporate.  To be taxed as a corporation, you would need to file a separate form with the IRS.  If you opt not to do anything, you will default to sole proprietor taxation.  To be taxed as a sole proprietor means you would use one of the Schedules and file with your personal income taxes.

In California, LLCs electing to be taxed as corporations have no annual fees. Whereas, an LLC taxed as a partnership or sole proprietorship will have an “LLC fee” if its income is greater than $250,000.

3.  Liability

Sole Proprietor: Since a sole proprietorship means you are your business, it also follows that your business’ income and debts are also yours.  This simplifies your tax preparation, but it complicates your liability.  If your business goes bankrupt, you go bankrupt. If your business is sued by a customer or employee, you are personally sued in the process.  If your business loses all its assets, you could lose all of your personal assets.  Probably the most significant reason small business owners choose to register an LLC over sole-proprietorship is to protect themselves from full liability.

Single-member LLC: A limited liability company means, quite literally, that is offers limited liability protection to its members.  Each state has different limitations and rights afforded to LLCs, so its important not to just read an article on a generic website or service, but specifically refer to California Corporations Code.

An LLC protects its members from outside liability suits, but it does not protect from internal suits, meaning members can sue each other for e.g., profit losses. However, this protection is not all-inclusive. In some cases such as personal negligence, LLC members can lose their personal assets. In other cases, external creditors can obtain your shares in an LLC, or your share of the profit distribution.

Note: It’s important to note that one of the main differences in operating a sole proprietorship and an LLC is the separation of personal and business funds.  As a sole proprietor, you don’t have to keep close records of your business funds. However, as a member of an LLC, you do need to keep your business funds and expenses separate from your personal funds. If you fail to do so, you may lose your liability protection.

 

If you are unsure as to whether you need an LLC, or if another type of business entity would better suit you, contact an experienced business attorney. You may also want to contact an insurance representative to discuss liability insurance.