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Learn about "Employer Identification Number (Company EIN)"
The employer identification number or EIN, also often called the federal tax identification number, is the number used by the Internal Revenue Service (IRS) to identify a business. It is basically a Social Security Number for a business, and it must be included on all tax filings a business makes.
If you operated your business as a sole proprietorship or general partnership, your EIN was your Social Security Number. When you incorporate or form a limited liability company (LLC), you must apply to receive a new number from the IRS.
In order to obtain an EIN, Form SS-4 must be completed and filed with the IRS. Certain states also require corporations and LLCs to obtain a state tax identification number. To learn if your state requires this, you should contact your state taxation authority.
Tax Return Services with BizFilings assitance provides two EIN-related offerings. With the SS-4 Form Preparation Service, BizFilings will prepare this form on behalf of your business, and then send it to you for you to submit to the IRS. This service is included in our Standard and Complete Formation Service, or can be added to our Basic Formation service for $25.
With the EIN Obtainment Service, BizFilings will prepare form SS-4, submit it to the IRS, and obtain the number on behalf of your business. This service is included with our Complete Formation Service and can be added to our Standard Formation Service for $45, or selected with our Basic Formation Service for $70.
To take advantage of BizFilings’ formation services, click here to access our order form. OR Call 800-981-7183 and provide referral code A2324 for immediate answers
Learn about "Limited Liability Companies"
The limited liability company (LLC) is a distinct business entity that combines the corporate advantage of limited liability protection with “pass-through” taxation, the method of taxation afforded to both general partnerships and S corporations.
Like corporations, LLCs come into existence after making a filing with the appropriate state body, typically the Secretary of State, and paying the necessary state filing fees. The LLC formation documents are typically called articles of organization or a certificate of organization.
In terms of taxation, the LLC’s income is not taxed at the entity level as is that of a C corporation. While the LLC does complete a tax return, the income or loss of the LLC as shown on this return is passed through the LLC and is reported on the owners’ individual tax returns. The LLC’s owners then pay taxes on the LLC’s profits at the individual tax level. LLCs can elect with the Internal Revenue Service (IRS) to be taxed like a C corporation, but this is not overly common.
Other advantages of LLCs include:
- Members are typically not held personally responsible for the debts and liabilities of the company.
- Forming an LLC can help establish credibility for a new business with potential customers, employees, vendors, and partners.
- There are generally no restrictions on the number of members allowed.
- LLCs have flexibility in structuring the management of the company.
- LLCs do not require as much annual paperwork or have as many formalities as corporations and S corporations.
Some disadvantages of LLCs include:
- LLCs are more expensive to form than sole proprietorships and general partnerships.
- LLCs face more ongoing requirements, such as state annual report filings, than sole proprietorships and general partnerships.
- Ownership is typically harder to transfer than with a corporation.
- Because the LLC is a newer business structure, there is not as much case law to rely on for determining precedent.
Regarding the ownership of an LLC, the owners are called members. Members are analogous to shareholders in a corporation or partners in a partnership, depending on how the LLC is structured. Members will more closely resemble shareholders if the LLC utilizes a manager or managers because the members will not directly participate in the management of the LLC. If the LLC does not utilize managers, then the members will more closely resemble partners because they will have a direct say in the decision-making of the company. An LLC must specify at the time of formation whether it will be managed by members or managers.
A member’s ownership of an LLC is represented by “membership interest,” just like a partner’s interest in a partnership or a shareholder’s shares of stock in a corporation.
When evaluating whether the LLC is the right business structure for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals.
Learn about "C Corporations"
The standard corporation, also called a C corporation, is a very common business structure. Corporations are separate legal entities that are owned by shareholders. Conversely, sole proprietorships and partnerships are not separate legal entities. They are considered to be the same as the owner(s). In order to form a corporation, the appropriate formation documents, usually called the articles of incorporation or a certificate of incorporation, must be filed with the state and the state filing fees be paid.
The primary advantage of incorporating a business is the limited liability the corporate entity affords its shareholders. Typically, shareholders are not personally liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder to pay debts owed by the corporation. In a partnership or sole proprietorship the owner’s personal assets may be used to pay debts of the business.
Other advantages of incorporating a business include:
- Incorporating may establish credibility for a new business with potential customers, employees, vendors, and partners.
- The ownership of a corporation is easily transferable through the sale of stock.
- Corporations have unlimited life extending beyond the illness or death of owners.
- Certain expenses, such as insurance, travel, and qualified retirement plans are typically tax-deductible.
- Additional capital can be easily raised through the sale of stock (shares) in a corporation.
The main disadvantage to forming a C corporation is often considered to be the potential for double taxation. C corporations are considered separately taxable entities by the Internal Revenue Service (IRS), and taxes must be paid on the profits of the corporation. If a corporation then distributes its profits to shareholders in the form of dividends, the dividend income is also taxed as regular income to the shareholders. In this case, the corporation’s profits are taxed twice, first as income to the corporation and second as dividend income to the shareholder, creating the “double-tax.”
However, not all income a shareholder receives from a C corporation is subject to the double tax. For example, if the shareholder is also an employee of the corporation, that shareholder will most likely receive a salary payment from the corporation. As long as the salary paid to the shareholder is considered by the IRS to be reasonable (or similar to the market salary rates for that position), it is treated as a business expense and is deductible to the corporation. This helps reduce the amount of taxable income the corporation has.
In order to eliminate the possibility of double taxation, C corporations can elect to be taxed as an S corporation with the IRS. With S corporations, the profits and losses of the corporation are reported on the individual tax returns of the shareholders, and any necessary tax is paid at the individual level. This taxation method is called “pass-through” taxation, since the profit or loss of the corporation is passed through to the shareholders.
Other aspects of C corporations that can be considered disadvantages include:
- Corporations are more expensive to form than sole proprietorships and partnerships.
- There are more corporate formalities, such as annual paperwork, and more state and federal rules and regulations, than with sole proprietorships and general partnerships.
When evaluating whether the corporate structure is right for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. You may also wish to seek the advice of an attorney or accountant.
Learn about "Ongoing Compliance – Protect Your Business Structure"
Many new business owners are unaware of the requirements they must fulfill in order to keep their corporation or limited liability company (LLC) compliant with the state of formation. Incorporating a business or forming an LLC offers business owners the protection of limited liability, meaning the owners are typically not held responsible for the debts of the company. However, just having a corporation or LLC does not mean that the owners’ personal assets are continually protected. Business owners must comply with specific requirements in order to remain protected under that corporate or LLC status. Otherwise, their limited liability may be lost, which is known as “piercing the corporate veil.” Small business owners should understand the direness of this situation and work to maintain the limited liability the corporation or LLC affords them.
All states impose certain requirements on corporations and LLCs formed there. One such requirement is the filing of an annual statement (a biennial statement in some states). These statements are the state’s way of keeping updated information on corporations and LLCs. Most states also impose a filing fee on these statements. Not filing annual statements and paying the necessary fees in a timely manner can result in the corporation or LLC being in “bad standing” with the state. Being in bad standing in a state can eventually lead to administrative dissolution of the corporation or LLC. Therefore keeping your corporation or LLC in good standing at the state level is important.
Additionally, corporations are subject to a number of other ongoing requirements and formalities. History has dictated that such requirements must be satisfied in order to protect the corporate status. These formalities include, but are not limited to:
- Hold initial meeting of directors. After the formation of the corporation is complete, the corporation should hold an initial meeting of directors, also called an organizational meeting. At this meeting, the bylaws are adopted, officers are elected, and stock is issued to all shareholders.
- Adopt bylaws after incorporating. Each corporation must adopt bylaws, which is a document that outlines how the internal affairs of the corporation will be executed. The bylaws are the second most important document behind the articles of incorporation. As mentioned above, the bylaws should be adopted at the initial meeting of directors.
- Conduct business on the corporation’s behalf. Officers and directors should visibly be acting on behalf of, and in the best interest of the corporation. This is very important when it comes to officers or directors entering into contracts for the corporation.
- Hold annual meetings of directors and shareholders. One requirement of all corporations is that they hold annual meetings of both directors and shareholders. It is also important that the minutes of these meetings be kept with the corporate records. If items of business are determined by unanimous consent in lieu of holding a meeting, which is popular with many closely-held corporations, the unanimous consent documents should be kept with the corporate records.
- Keep documentation of corporate activity. In addition to keeping minutes of all director and shareholder meetings, it is important for corporations to maintain a stock ledger that records all shares of stock issued to shareholders and the contributed amount each share represents. Also, be sure to keep contracts into which the corporation enters, including leases or major business contracts.
- Keep documentation of corporate financial activity. Corporations should record all disbursements, payments received, invoices issued (accounts receivable), and invoices received (accounts payable), and keep those records for a period of 7 years. Corporations should also keep balance sheets and profit and loss statements for each year. Additionally, it’s important to document any loans taken by the corporation, as well as the repayment terms.
It is important to remember that a corporation is a legal entity that exists separately from its owners. Owners therefore have a duty to maintain that separation. By failing to conduct these requirements, business owners risk losing the protection towards their personal assets. For example, if the basic corporate requirements aren’t followed, and your corporation is sued, the plaintiff may try to name you personally in the lawsuit by claiming you (as a shareholder) are liable because you have not created a distinct separation between the corporation and yourself.
While any one of the items listed above on their own may not be enough to pierce the corporate veil, multiple items could lead to such an outcome. Additionally, the items mentioned below have caused courts to rule that the corporate veil has been pierced.
- Commingling of the owner’s personal assets with the assets of the business.
- A shareholder or shareholders engaging in illegal, and/or fraudulent, and/or negligent acts (which can also result in the shareholders being convicted of criminal acts and possibly sent to jail).
- Inadequate capitalization of the business.
While LLCs do not have the formal ongoing requirements that corporations have, it is recommended that LLCs undertake many of the same steps. Common recommendations for LLCs include:
- Hold an organizational meeting. After the formation of the LLC is complete, the members or managers should hold a formal meeting to adopt an operating agreement and issue membership interest to members.
- Adopt an operating agreement. As with the corporate bylaws, the operating agreement for an LLC is an important document that outlines the internal governance of the LLC.
- Keep documentation of the LLC’s activity. It is typically considered beneficial to keep record of any changes in membership interest and also to keep record of all major business decisions of the LLC, such as contracts and leases.
- Keep documentation of financial activity. LLCs should maintain the same financial information outlined above for corporations.
- Hold annual meetings of members. Holding and documenting the business conducted at annual meetings of the members or managers helps LLCs keep updated ongoing records of decisions made by the owners.
Tax Return Services, with BizFilings assistance can support you in keeping your corporation or LLC compliant with requirements in any state. BizFilings provides BizComply is a web-based application that outlines critical compliance events, notifies you before these events need to happen, provides access to important forms, and houses your company’s important information in one convenient location. If you are an owner of multiple businesses, you can keep track of each business through a single account. Additionally, if your business is qualified in other states, BizComply will help you manage the compliance requirements for each of those states. Click here to learn more about this product.
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