As the end of the year approaches, one very important question is on the minds of many our clients:

Should we dissolve our unused corporation or LLC, or face another year of taxes?

The end of a relationship can involve a mixture of emotions – pain, happiness, relief. The ending of a business is much the same especially when your business is often one of the most intimate relationships in your life.

As with so many partings, you and your business need closure. As far as the law is concerned, that will likely include the filing a certificate of dissolution for corporations and a certificate of cancellation of LLCs, and perhaps other steps for your situation, including shareholder. board, or member approval.

On its face, that seems easy enough – find the right business forms on the Secretary of State’s website, fill it out, send it in. In fact, there aren’t even fees unless you need a rush processing. Or use Formation Solutions to assist in this matter: California for-profit corporation dissolution, LLC dissolution

But read carefully. Every form has conditions. The state wants to know things have ended responsibly.

In order to wind-up your corporation, you’ll need to have a few things done.

1. Your corporation’s debts need to be provided for – either completely paid, arranged to be paid or paid to the maximum extent of which the corporation is capable.
2. Any assets must be divided up equitably among the shareholders.
3. The corporation must file a final return with the California Franchise Tax Board.

You must also report how it was determined to dissolve the corporation – whether by unanimous vote of the shareholders, or by partial vote. If it was by a vote of less than 100 percent, you will need to file a Certificate of Election to Wind-Up and Dissolve along with your Certificate of Dissolution.

LLCs face similar requirements. In order to make your way through a Certificate of Cancellation, you’ll need to have several issues resolved.

1. Your LLC will need to distribute assets and any profits to its members.
2. The company will need to have its debts paid or arranged to be paid.
3. A final tax-return must be filed with the California Franchise Tax-Board or you must certify that it will be done.

Again, if the ending of the LLC wasn’t done my unanimous vote of the members, you’ll need to complete a supplementary Certificate of Dissolution to explain the circumstances surrounding the cancellation. The form requests any supplementary proof you have of an honest, correct dissolution vote.

With both corporations and LLCs, if a company never had assets or the entity was never actually used to conduct business, the dissolution forms become simple and easy. In activity of a significant length of time provides a similar benefit.

The main thing is to keep good records – especially of ownership votes to dissolve and your wind-up accounting.

Although situations may vary, many believe that completing the legal dissolution process is an important step to protect yourself. Please consult with an attorney on such matters. If it’s daunting or there are complicated circumstances surrounding your dissolution – get a qualified business attorney to assist you and guide you through the process.

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Nothing feels worse than paying more than you have to because of your own actions. With all things you manage to drive your business, it can be challenging to keep track of legalities that may seem fairly boring or unimportant by comparison.

The only problem – they aren’t so unimportant.

Forgetting important filings and renewals can cost you a lot in late fees and penalties. The first step is maintaining a list of the things you need to track.

1. Statement of Information. California requires every corporation and LLC to file a Statement of Information with the Secretary of State. For-profit corporations need to file annually based on your date of formation while LLCs and non-profits can file biennially. You’ll only part with $25 if you get your Statement in on time. Once your company becomes delinquent, expect a hefty $250 penalty fee to get everything straightened out. Most other states have a similar filing requirement.

2. Tax Returns. No one should be surprised that the IRS and the California Franchise Tax Board want to hear from you at least annually and on-time. You can ask for extensions if necessary – but you need to communicate. If you owe money and you file late, expect late penalties. If you file and pay taxes quarterly based on expected earnings – then you need to be extra careful to track your taxes. If you file annually, note the ending of your business’ tax-year and make sure to file within four months of your tax-year ending.

3. State Licenses. If your business receives special licenses or permits from the state, keep track of the expiration date. Expirations can have no rhyme or reason other than they are the anniversary of the date the state initially processed your license. The consequences of operating without a valid license can be steep and severe – especially if your business is in a field like healthcare, gas stations, insurance, or finance.

4. Local Licenses. They may not seem like much – just a certificate that you might post on the wall somewhere in your office – but local business licenses are still an important legality. Again, these licenses are usually renewable on the anniversary of their initial issuance. You need to note this down and keep track. More importantly, if you operate a business that is specifically regulated by your county or city such as restaurants, then you can face expensive penalties or even forced closure if you don’t keep up on regulations.

As an example, the City of Los Angeles is known for tracking down companies that have not filed for their city business tax certificate, and imposing heavy fines and interest.

5. Federal Regulatory Fees and Permits. If you are a business lucky enough to fall under federal supervision, then you probably need no reminder of the importance of compliance. Keep careful track of your filings and fees. Companies which deal in securities should make SEC and FINRA compliance a top issue just as construction companies that deal with environmental issues need to keep up with permits and fees to the EPA.

In all of these situations – the key is to create deadlines and markers in your calendar – even if you have someone your rely on to deal with these tasks for you. Someone else’s negligence or mistake could cost you financially or even cost you your business.

Best Practice: mark down renewal fee and filing reminders two months in advance of their deadlines. Handle it early. Check in with your accountant, attorney, assistant or whoever you have helping you with these matters as soon as you see that reminder in your calendar.

While many, if not most government agencies will send you reminder notices or forms, you can’t rely on them – and they will hold you accountable either way.

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Tax concerns are usually at the top of the list when it comes to selecting an operating structure. Here’s a quick overview of a few tax benefits for the most common business entities:

A  Sole Proprietorship is the default structure if you’re operating on your own and haven’t officially registered your business as a corporation, LLC (Limited Liability Company), or Non-profit.  A sole proprietorship is NOT a legal business entity: you pay personal income tax on your earnings (as well as self-employment tax), can subtract some expenses as itemized business deductions on your tax return, and you’re personally liable for all of the debts the business incurs.

Why it might be a good idea

• You’re only taxed once on your earnings from the business
• There’s no need to file a separate tax return for the business
• Net losses can be “carried” to prior or later tax years to offset tax liability
• Hidden tax perks, like healthcare reimbursement arrangements and provisions for hiring family members abound

A traditional Partnership is also a “pass through” business entity, and is sometimes seen as the default structure when multiple parties run a business without forming an official entity (like an LLC or corporation). Just like a sole proprietorship, capital gains and income are taxed to the business owners, typically at a higher rate than they would be for some other business structures.

Why it might be a good idea:

• Partners are only taxed once on business earnings
• Partners can “assign” property, income, or debt to other partners, allowing for a tremendous tax savings in many cases.
• Assets can be more easily transferred out of the business to the owners without “property disbursement” taxes

The two main types of corporations are S-Corporations and C-Corporations.

First, it’s important to understand that corporations are considered a C corp when they are formed. With the Secretary of State, there is no distinction. To them, you are just “a corporation.” Period. Not S or C. This is a distinction made by the IRS and honored by state tax boards.

An affirmative action (making an election to be taxed as a small business corporation: IRS Form 2553) is needed to change your “C” corporation to an “S corp.”

A C-corporation files corporate tax returns and pays taxes on its profits. Then, from what remains after taxes, a corporation may distribute earnings to shareholders in the the form of dividends. Shareholders are then taxed on dividends, which means that the owners effectively pay taxes on the same earnings twice- once at the corporate level, and then as individuals.  This is known as “double taxation.”

For some situations, a C corp can be preferable. Most of our clients are small businesses and prefer to make the S election.

An S-Corp works like a sole proprietorship or general partnership, where income passes through and is taxed to individual shareholders.  Typically, profits and losses are allocated proportionally to ownership share.

Why an S-Corp might be a good idea:

• No self-employment tax, resulting in considerable tax savings in many cases
• Pass-through taxation means that losses can be deducted on your personal income tax return

Why a C-Corp might be a good idea:

• Corporate tax rates are often lower than top-bracket personal tax rates
• Special incentives for hiring, purchasing equipment, and other expansion-based activities (including deductions for start-up costs)

Limited Liability Companies and Limited Liability Partnerships

LLCs and LLPs are statutory business entities where rules can vary from state to state.  Generally, both LLCs and LLPs can elect to be taxed as much like S-Corporations or general partnerships, where income “passes through” the entity directly to the owners.  This avoids the double-tax issue faced by a traditional C-Corporation.

Why it might be a good idea:

• Typically considered flexible in terms of taxation
• Flexibility in profit distribution means that owners can assign income and losses in the most advantageous way for tax purposes

Though tax savings is an important consideration, the type of entity most suited to your business will depend on a variety of factors. We always recommend that you consult with a professional tax adviser to find the appropriate entity for your situation. If you’d like assistance in finding a great CPA or attorney for guidance on these issues, contact Formation Solutions. Also talk with other business owners, and do your research before making a decision.  If you’ve got any tax tips for new business owners, comments, or questions please share ‘em with us!

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Every LLC that is doing business in California is subject to the $800 annual tax. This includes any LLC that has articles of organization issued by the Secretary of State, as well as LLC’s that are formed in other states and have been issued a certificate of registration to do business in California.

The tax must be paid for each taxable year until a certificate of cancellation of registration or of articles of organization is filed with the SOS.

When is the Annual LLC Tax Due?

This, directly from the SOS Form 3522 Instructions:

The annual LLC tax is due and payable by the 15th day of the 4th month after the beginning of the LLC’s taxable year (fiscal year) or April 15, 2010 (calendar year).

The first taxable year of an LLC begins when the LLC files its articles of organization with the SOS. The first taxable year of a foreign LLC begins when the LLC is organized in another state.

If the 15th day of the 4th month of an existing foreign LLC’s taxable year has passed before the foreign LLC commences business in California or registers with the SOS, the annual LLC tax should be paid immediately after commencing business or registering with the SOS.

CPAs have told us that a new LLC, formed in California, has 4 months from the formation date to pay the tax. To avoid possible late fees, I’d recommend checking with your CPA and/or the FTB to make sure this is still correct.

And what if an LLC is formed in another state, and then it registers to do business in California at a later date? Here’s the example given by the FTB:

Example: LLC1, a newly-formed calendar year taxpayer, organizes as an LLC in Delaware on June 1, 2010. LLC1 registers with the SOS on August 13, 2010, and begins doing business in California on August 14, 2010. Because LLC1’s initial taxable year began on June 1, 2010, the annual LLC tax is due by September 15, 2010 (the 15th day of the 4th month of the short-period taxable year). LLC1’s short-period (June 1, 2010-December 31, 2010) tax return is due by April 15, 2011. The annual tax payment for taxable year 2011, with form FTB 3522 also is due by April 15, 2011.

More Information from the California Franchise Tax Board:

• CA Franchise Tax Board – State taxation information for LLCs.
• CA Franchise Tax Board – Forms and Schedules for LLCs.

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In Part 1, we laid out some ways to plan for a lower tax bill in 2009. If you haven’t seen Part I, check it out: End of Year Tax Tips For Small Business, Part 1.

Here are some more ideas for your business.

Pay Your Bills Now

Rent, utilities, insurance, advertising: these are all familiar expenditures for your small business. Many financial professionals recommend paying these bills early in order to save money on your tax returns. This deduction is also valid for employee bonuses – a kind year-end gesture that benefits your finances in the long term.

Get Up To Date With Tax Laws

Staying up to date with current tax laws is among the best ways to save the most money. After all, how can you do what’s best for your small business if you don’t know what the laws are? Consult with your CPA or financial advisor to find out the tax laws most relevant to your business.

Do you need a great CPA, financial advisor of bookkeeper? Contact us and we’ll refer you to someone.

You can also check out the IRS website for more information. They have a full list of qualified deductions that small businesses may claim. Many small business owners miss deductions through ignorance of the law. Keeping current will rectify any omissions and benefit your business.

Here’s an IRS Article on Business Expenses.

Here’s some final advice.

Make sure you have receipts for every transaction you wish to deduct on your tax return. Keeping receipts makes bookkeeping a snap, and will be a life-saver if you should ever have a visit from the tax man.

So then, doesn’t this sound like a fun way to spend the last two weeks of December? Turning away from holiday festivities to work on your business may seem Scrooge-like, but it really is a great way to get a ready for a prosperous 2010!

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Small business owners of the world: congratulate yourselves on making it to the end of a tough financial year! Your business is still afloat, still running, and still profitable despite the gloom and doom we’ve all suffered through the last 12 months.

And there’s even more good news: we’re going to tell you about a few ways you can save money on your taxes.

Our end of the year tax tips have more to do with timing than than income level, which makes them perfect, across-the-board strategies for all types of small businesses. Using just one of these tips might save you serious money in the long run.

What You Need To Know

Every dollar spent, earned, and saved before January 1st is the business of the IRS come April 2010. Planning is everything. Getting a head start on preparations for tax day is a great way to tie up loose ends while maximizing savings for your business.

The most basic thing a small business can do to get ready for tax day is organize the books and update accounts to reflect the most current data. Doing so will give owners a clear idea of what they’ll be paying in 2010.

If you need help finding a great CPA or bookkeeper, contact us. We’ll refer you to someone perfect for you.

It’s easy to save your business money by employing on or more of the following tax saving strategies.

Start a Retirement Plan

If you haven’t already, think about creating a retirement plan. Payments can reduce your income and turn into real savings on your tax return for the following year. Different plans (Simple, SEP, etc.) have individual limits and deadlines, so work with your CPA or financial planner to select the plan that’s ideal for your small business.

Defer Income

This tip is good for small businesses that operate with cash. Basically, any income you earn through December will be taxable in 2010.  Instead of accepting any pending income immediately, you may decide to defer payment until the new year. The money earned will not be considered taxable until 2011. This is an especially attractive option for small businesses that work with clients on a daily basis. Offer to defer payments on any services until the new year or simply send out invoices late in the month. Your business will save money and your clients will thank you for the extra time.

Go Shopping

Yes, this tip seems a bit backwards. However, spending money on your business before the year is out can increase the amount of tax deductions your business is allowed to claim. If you think you’ll need supplies in early 2010, buy the goods now and use them before the year is out. Purchase new equipment and clear out damaged inventory.

More tips to come. Stay tuned.

(And here it is: End of Year Tax Tips For Small Business, Part 2)

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Question posed to the Wall Street Journal Small Business Video series: as personal tax rates increase, isn’t it a good idea to form a C corporation and be taxed at the corporate rate?

The answer: for most small businesses, no. Most small businesses would be better as an S corporation or an LLC.

See the advice from Michael Hanley, CPA and partner of Merl & Hanley. He explains that although personal and corporate tax rates may be similar, the actual taxable income will often be less on a personal return.

The taxable income of the business, if a C corporation, would be taxed at that amount. However, if the company is an S corp, that amount passes through to the individual, who then can apply a series of deductions to that amount, such as the standard deduction, mortgage interest dedection, etc. All this brings he taxable amount down.

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Here’s a great iPhone app that I’ve been using to track miles for expenses.

Trip Cubby.

You can set up multiple cars, save frequent destinations, auto-calculates miles, syncs with a server side database for backup. You can have it email you a log file to open in Excel and dump into your tracking log or expense report.

I’m please with the functionality and usability.

 Take a look and give it a test drive: Trip Cubby iPhone App.

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As your company grows and changes, you may want to consider if you have the right entity type for the present stage of your business.

Perhaps you’ve chosen to do business as a sole proprietor to avoid the costs and maintenance of a formal business entity, and you are concerned with the liabilities associated with the business and how your personal assets are at risk.

Perhaps you chose to form as an LLC, for the simplicity of maintenance and liability protection, and you’re at a stage where you’d like to take outside investment. You may find that investors’ preference is to be a shareholder of a corporation, not a member of an LLC.

Perhaps you organized as an S corporation for the benefits of pass-through taxation and liability protection, but now you’ve reached some of the limitations of an S corporation.

Perhaps you’ve formed as an LLC in California, and your revenue has reached the threshold where your franchise tax is being calculated on gross receipts, not on profit.

However your business grows, the decision of entity type should be revisited periodically. Since businesses change over time, there is not necessarily one best choice for all stages of a company’s life.

Each entity type can have its advantages and limitation. Here are some questions to ponder:

• How important is it to protect your personal assets against liabilities and debts of the business?
• Will the number and type of owners change in the future?
• If you are an LLC, are you paying taxes calculated on gross receipts, and could you reduce your taxes by becoming a corporation?
• Are you satisfied with how you presently allocate profits and losses among owners?
• Do you anticipate changes in how you’ll want to allocate profits and losses?
• Do you want to provide retirement and fringe benefits to owners?
• Do you want to offer medical reimbursement to owners?
• What are the plans for future growth?

As always, if you have any questions, please contact us here or at (800) 610-0373. Some of these are questions for your accountant or attorney, and we’ll do our best to get you answers or point you in the right direction.

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Considering forming an LLC or corporation in the state of Delaware?

There are many reasons that companies form in Delaware.

One thing that attracts many of our clients is the lack of income tax for corporations and LLC’s. But what many entrepreneurs don’t know is that there is a franchise tax. That is, there is a yearly minimum tax due, no matter what.

And for a new business, it can be substantial.

So much is this franchise tax? Let’s break it down…

There are two methods of calculating the franchise tax amount in Delaware: the “Authorized Shares Method” and the “Assumed Par Value Capital” method. You pay the lesser of the two approaches.

Say your corporation authorizes 100,000 shares. By the “Authorized Shares Method” of calculation, the annual franchise tax will be $825.

If you authorize 100,000 shares, the franchise tax is $7,575.

If you use the Assumed Par Value Capital method, it may be less, but this depends on what you’ve set your per share par value to.

A Example Case:

An accountant recently told us of a startup that planned to form in Delaware. They were going to issue 10 million shares to the founders, form a stock option pool of another 10 million shares, then sell another 10 million shares to investors at a value of $5 per share.

Sounded like a solid plan to the entrepreneurs until the CPA ran the numbers on the franchise tax. The “Authorized Shares Method” for 30 million shares authorized calculates a tax bill of $180,000 per year.

By the Assumed Par Value method, its less, but still substantial: $17,500.

Once the CPA explained this to them, they changed their plans and formed in California, where the business was based, and saved a ton of capital right out of the gate.

So consider this franchise tax before jumping at forming a corporation or LLC in Delware. Talk to us. We’re here to help with your questions.

And also, as always, talk to your accountant. If you don’t have someone that you’re working with, contact us, and we’ll refer you to several top quality CPAs to speak with.

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