A Minnesota business also may organize as a limited liability company. A limited liability company elects to be treated for tax purposes as a sole proprietorship (disregarded entity), partnership, or corporation. A limited liability company may have one or more members. As described further in the section on tax considerations in choosing the form of organization, organizers of Minnesota limited liability companies have some flexibility with respect to the federal income tax treatment of such entities due to the Treasury Regulations on entity classification. These Regulations appear in 26 C.F.R. § 301.7701-1 et. seq. A limited liability company with more than one member may choose to be taxed as a partnership or a corporation. In either event, the limited liability company must obtain both federal and state tax identification numbers, even if it has no employees.
A limited liability company with only one member may be taxed as a corporation or as a sole proprietorship. A limited liability company that chooses to be taxed as a sole proprietorship generally does not obtain a federal or state tax identification number unless it has employees in which case it will obtain tax ID numbers and use them to remit unemployment taxes. Business income and losses of the limited liability company that chooses to taxed as a partnership or as a sole proprietorship may be passed through to the owners of the business. The income of a limited liability company that chooses to taxed as a partnership or as a sole proprietorship is included in the taxable income of the member or members and taxed at the owner’s individual tax rate. Like a corporation, a liability for business debts and obligations generally rests with the entity rather than with the individual owners. A limited liability company is not subject to many of the restrictions that apply to S corporations. All members of a limited liability company may participate in the active management of the company without risking loss of limited personal liability. It is managed by a board of governors and an active manager.
Newlyweds are typically the recipients of well wishes and presents from friends and family alike. Although Congress is neither friend nor family, it also leaves its imprint on the occasion by bestowing important tax benefits upon married couples. For the typical taxpayer, the impact of this favorable treatment is most visible through the joint taxation of the marital unit. Joint returns are subject to tax rates which are lower their individual counterparts. In addition, the benefits of this arrangement are compounded by the ability of a married couple to jointly file regardless of their respective incomes. As such, joint returns represent a permissible method of income shifting. Although Minnesotans often benefit by filing a joint return, such an arrangement can also produce inequitable results.
In addition to the above-listed benefits, taxpayers who file as a couple are also subject to joint and several liability for the payment of tax, including interest and penalties. Joint and several liability can create an injustice where only one of the spouses is liable for the underlying tax deficiency. One common situation involves a wife who the IRS claims is liable for additional tax on a joint return due to the illegal activities of her husband. Prior to 1971, the wife in this example would be held liable for the tax, interest, and resulting penalties even though she had no knowledge of her husband’s illegal activities.
In recognition of this problem, Congress passed Interal Revenue Code Section 6015. This provision, also known as “innocent spouse” relief, grants a limited release from joint liability under certain circumstances. Originally narrow in scope, Section 6015 was extensively revised in 1998 to extend protection to a greater number of people. Under Section 6015(b), relief will be granted if the affected spouse can establish that she did not know of the liability attributable to an erroneous item of her husband. Equally important, the petitioner for relief must establish that it would be inequitable to be held liable for the deficiency in tax. In order to apply for innocent spouse relief, the petitioner must elect to apply this provision within two years after the date on which the IRS has instituted collection activities.
Although it may seem like a simple procedure, the above-described provision entails an inquiry which is highly fact specific. If the IRS is attempting to collect a debt attributed to the illegal acts of your spouse (or former spouse), do not hesitate to contact a tax attorney.
There are many old adages that apply to why a small business needs to consult with and use the services of an attorney. My favorite is “You don’t know what you don’t know!” It is your job as an entrepreneur to focus on what you do best, which would be to run your business. It is the job of the attorney to understand and provide proper guidance regarding the legal hurdles and pitfalls that are waiting for small businesses. Four legal hurdles that small businesses are likely to encounter include the need for contracts, which choice of entity to select, real estate and need for an exit strategy.
At various times, every small business will need to have a contract drafted. An attorney will be able to help the business determine the exact language that should be included in the contract. The types of contracts that may need to be drafted include contracts for customers, clients, suppliers and even co-owners. Continue reading →
There are three main differences between an S-Corporation “S-Corp.” and a Limited Liability Company “LLC”. These differences are (1) ownership restrictions, (2) the treatment of self-employment tax and (3) the distribution of profits and losses.
The ownership restrictions for an S-Corp. are much more substantial than those of an LLC. Pursuant to IRS code section 1362, an S-Corp. cannot have more than 100 shareholders. While this provision is very limiting, it does allow for a family to count as one shareholder. S-Corps. also have a limitation on who can be a shareholder. A shareholder must be either US citizens or resident aliens. What this means is that no corporations or LLCs may be a shareholder of an S-Corp. Finally, an S-Corp. may only have one class of stock. However, the S-Corp. can differentiate whether the shareholders are able to have voting rights in that one class of stock.
There are two truths to consider when a taxpayer receives a letter from the IRS as the result of an erroneous or incomplete tax return. In this event, a taxpayer should take comfort in the fact that tax disputes involving the IRS are commonplace in modern society. Automated Collection Services, a core component of IRS activity, generates millions of demand letters on an annual basis. Thus, receiving an IRS collection letter does not transform an otherwise normal citizen into a societal outcast. After digesting this information, a taxpayer must also account for another simple truth. If a taxpayer suffers the misfortune of receiving an IRS collection letter, subsequent inaction will produce the least desirable outcome. If the collection letter was issued as the result of an erroneous return, the taxpayer should verify the actual existence of an error. Continue reading →