Running your business is hard work. You plan, budget, and develop strategies to ensure that you will achieve long-term success. But, have you considered what impact the way your business is filed with the state will have on your taxes? Sometimes these answers are unclear, but they aren’t always a priority in your day to day business operations. Whether you’re just starting or have an already-established business, you can fill the knowledge gap with some planning and a review of your state laws.
For instance, if you are the only employee within your sole proprietorship, then you do not need an employee identification number (EIN). However, according to the IRS, you can get one. It is a requirement, though, if you have any employees. You will need an EIN to report the FICA and payroll taxes you collect and submit to the government for your employees. Sole Proprietorships vs LLCs have pros and cons, and here’s your chance to make sense out of some of them so you become better prepared to make the best decision when it comes to reporting your taxes.
Business name requirements
Whether you have a Sole Proprietorship vs LLC or an LLP, you are required to file a Fictitious Business Name (FBN) Statement with your county. The approach to filing varies somewhat from state to state. In some states, you can select the county of operation when you apply for Articles of Organization with the Secretary of State.
The State of California, for example, requires you to submit your business name registration with the county separately from the annual Statement of Information requirement. Other phrases from state to state are assumed business names (ABNs) and doing business as (DBAs). DBAs usually arise from a person or business entity associated with another publicly advertised name.
Name registration becomes particularly important in the case of sole proprietorships vs LLCs. You must run a search with your state to ensure that an existing LLC doesn’t already have the name you want to use. It is also advisable to check your county registry before you attempt to use any name.
Taxes on Single Member LLCs vs Employer LLCs
Tax advantages and disadvantages depend on your business’s legal structure. If you are a Single-Member LLC (SMLLC), then you may be eligible for a tax deduction on 20% of qualified business income (QBI) on net profits under the Section 199a IRS rule. Certain applications to estates and trusts qualify as well, so be sure to check those out, too. Sole proprietorships are unable to take advantage of this tax reduction.
In California, an LLC can be classified as a corporation, a partnership, or a disregarded entity. Single-member entities are called disregarded entities in California and pass-through at the federal level. Unfortunately, all LLCs are required to pay the annual $800 minimum franchise tax with the Form 3522 LLC tax voucher. A separate 568 Return of Income form is required for reporting state taxes and calculates what you owe in taxes outside of the minimum $800 estimate. The Franchise Tax Board (FTB) requires payment by April 15th of every year. Companies are fined if they begin doing business in California and do not immediately register with the Franchise Tax Board and submit the voucher and payment.
Converting to an LLC in California
If you are currently registered as a sole proprietorship or a Corporation, you can convert to a limited liability company or limited liability partnership. The cost is $150 for corporations and $70 for other entity conversions. Entity conversions, franchise taxes, and business registration forms can be completed and submitted online.
Business, accounting, and tax advisory services
When you’re involved in the daily operations of your business, you have a lot to think about. Every now and then mishaps occur, and you deal with fires that need to be put out. Filing requirements and managing your tax liability for your business isn’t one of those situations you can repair as easily. Licensing, local and state permits, and employee labor laws don’t even begin to complete the tall lists of tasks that you are liable for as a business owner. Partnering with a full-service firm like SD Mayer can help you to cover all your bases so that nothing slips through the cracks and you can get back to doing what you do best: running your business.
The professionals at SD Mayer have decades of experience working with businesses locally and around the world. We take a holistic approach to your financial management, looking at every aspect of your business from top to bottom so that every base gets covered and so that your business entity structure is the best possible one for you. Contact us today to get started with an initial consultation.