Owning a small business is no easy task itself. It is difficult for owners to worry about making money and paying their bills. They must keep meticulous records if there were ever questions regarding their expenses by the government. Owners who operate as sole proprietors have their reporting requirements end here. They report their income and expenses on Schedule C of their individual tax return. However, owners of partnerships, Limited Liability Companies (LLCs), and corporations (S or C) have their own unique reporting requirements and clients should be aware, so they maintain proper compliance. Any clients needing assistance should reach out to us.
Should You Establish a Business Entity?
There are many factors to consider when deciding if you should operate your business as more than a sole proprietor. Being a sole proprietor is the simplest way to operate with the fewest reporting requirements. Sole proprietors will report their income and expenses on Schedule C of their individual tax return and be subject to self-employment taxes on the profits. There are many considerations both from a tax and legal standpoint that should impact your decision to take your business beyond sole propriety. How many individuals are involved in this business? Is legal protection a concern? How much of a profit is the company making? What are your long-term growth goals?
Partnership – A partnership is a formal agreement between two or more people to layout how a joint business venture should be run. Forming a partnership requires a separate return to be filed by March 15th to report the business profits/loss and create a K-1 that each partner will use to reflect their portion of the earnings on their individual return.
LLC – An LLC is a legal protection that protects personal assets from a potential lawsuit. The benefit of utilizing an LLC is strictly legal and does not provide tax benefits, unless it is chosen to be taxed as an S-Corp. When thinking of creating an LLC, it is best to consult a lawyer instead of a tax professional. Unless an election is made to be taxed as an S-Corp, a single-entity LLC will be taxed as a sole proprietor while a multi-member LLC will be taxed like a partnership. Earnings would be subject to self-employment tax.
S-Corp - Individuals who are making profits pushing $100,000 and above might benefit from being taxed as an S-Corp. An S-Corp allows owners to pay themselves a “reasonable salary,” while withholding payroll taxes, and treat the remainder of profits as business income, which is not subject to self-employment tax. Structuring your business as an S-Corp allows for easier addition of owners down the road. Similar to a partnership, an S-Corp requires a separate return to be filed by March 15th to report the business profits/loss and create a K-1 that each member will use to reflect their portion of the earnings on the individual return.
C-Corp – This allows owners to treat themselves as entirely separate entities from their business. The corporation will file a tax return and pay taxes on profits. Owners/employees will receive earnings from the corporation and pay tax on those earnings on their individual return. For small business owners the requirements and tax consequences of running a C-Corp are complex and those considering this structure should consult with an expert.
Beneficial Ownership Information Reports
The requirements for the Beneficial Ownership Information Reports (BOIRs) were established by the Corporate Transparency Act, passed in 2021. BOIRs are a new reporting requirement for owners who have established a business with a state’s secretary of state. Anyone who has established an LLC, a Doing Business As (DBA), or has incorporated are required to file this report, regardless of the state they established in. There are a few exceptions, namely being involved in a pooled investment group or non-profit.
Starting January 1st, 2024, individuals who owned interest in any of the entities with a reporting requirement were required to file a BOIR before December 31st, 2024 (then extended to January 13th, 2025 and currently on hold). Individuals who started an entity in 2024 were required to file a report within 90 days of establishing the entity, and starting in 2025, that deadline is shortened to 30 days. Additionally, if changes need to be made to an existing report, for example you moved and need to update your address, an updated report should be filed within 30 days of those changes.
However, there have been questions around enforceability of this law and reporting requirement as multiple lawsuits, countersuits, and injunctions have led to confusion regarding how business owners should approach this filing. In December of 2024, a national injunction had been put into place, then lifted, and then reinstated. As of December 31st, 2024, there are still questions as to how business owners should handle the BOIs and the January 13th, 2025 deadline is not enforceable.
Right now, the recommended approach is to file these reports according to the current deadlines to not get caught in a situation of being non-compliant. Individuals who need assistance in filing should provide us with the following information:
Name of company/LLC
Address of company activities – for small business owners who work from home, it would be their home address.
Federal ID of company – if the company does not have one, a social security number would be used.
Name of owners
Address of owners
Photo IDs of owners
Owners can also easily file them themselves at https://boiefiling.fincen.gov.
State Reporting Requirements
Generally, you will set up your LLC in the state in which you live or where the business is conducted. However, there is no rule/law that mandates that and you can in theory set up anywhere. You should consult a lawyer to advise on the benefits of utilizing one state over another. Whichever state you choose to set your LLC up in, you should be aware of the annual requirements. Many states require an annual or bi-annual report and fee to be filed and paid. The complexity of fulfilling these requirements varies greatly by state. Some states are as simple as logging into an account and paying a fee and confirming information has not changed. Other states, namely California, require a separate tax return to be prepared.
The most important takeaway individuals who form an LLC should be aware of is they need to stay on top of reporting requirements. Falling behind on reporting requirements/annual fees can result in the LLC losing legal status and reinstatement can be costly. Finding the status of your LLC can usually be done through the state’s secretary of state website. If assistance is needed in meeting requirements, we recommend a client consult with us or their lawyer that assisted in setup for further guidance.
Conclusion
Running your own business is an exciting endeavor. The day-to-day requirements are challenging enough. Having to stay on top of government regulations just adds to it. This year we are asking clients who own LLCs/S-Corps for additional information on our tax questionnaire to help assist them with staying on top of regulations. We would appreciate anyone who is unsure of their requirements to let us know this information so we can best assist you.
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