LLC filing

[Pacun]

I have a new client who is the only owner of an LLC in MD. Previous preparer filed sch C (using FEIN of LLC) and 1040. For MD, he filed only the regular personal forms. I have read that LLC has to file with the state where they are registered. I have dealt only with LLCs with two partners and I have filed for the LLC and distribute K1s to partners. Do I have to file with the IRS and/or the state (MD) for this pass-through disregarded entity or continue doing what the previous preparer did?

[Lion EA]

A disregarded entity is disregarded as a separate entity and is reported on the owner's personal tax return. For tax purposes, the LLC is disregarded; but for legal purposes, the LLC does exist according to state law.

[jainen]

>>A disregarded entity is disregarded as a separate entity<<

In my opinion, Maryland does not disregard an LLC as a separate entity, but requires an annual report the same as for a corporation, with a $300 filing fee.

[Lion EA]

For legal purposes, an LLC is a separate entity and makes all the various legal filings required by the state in which it was formed and any states in which it does business. For tax purposes, a SMLLC defaults to a disregarded entity if no election was made to be taxed differently. In most states, that means the LLC appears on the personal income tax return as it does on the federal income tax return. I don't file any MD returns, so check with the MD department of revenue for tax filing requirements and the MD secretary of state for legal filing requirements. In CT for instance, a SMLLC would file income taxes on the owner's Form CT-1040 but would file an annual report with the secretary of state for $20 and also file a business entity form and pay $250 for the privilege of being in business in CT.

[taxxcpa]

In Texas there is no personal income tax, but even a single-member LLC must file a TX Franchise tax. The way my tax software works, I have to prepare a Form 1065 (but not file it) and the data flows thru to the Franchise Tax.

[Diane]

In Maryland you file the single member LLC the same as Federal (Schedule C). There is an annual Personal Property Tax Return that has to be filed with a $300 fee. This annual report has to be filed in order to maintain the LLC status. This applies to Corporations, Partnerships, Non-profits, etc. The web site for info: http://www.dat.state.md.us/

Diane

[Pacun]

ALL four have good answers. That's why I love this forum, THANK YOU.

About a year ago, I read exactly what Jainen said but most preparers don't file LLC forms for MD. Maybe because $300 is a lot for (most of the time) nothing.

The owner of this LLC works only for one drywall company and the LLC gets a 1099misc. The owner is a tenant and has 3 cars with FMV less than $15,000. When he gets extra work, he gets another subcontractor (to whom he issues a 1099misc) and they work together. For the next 3 years, owner believes his employment situation will not change. He is under a payment plan with the IRS and MD from last year's schedule C taxes. He has a two checking account, one for the LLC and a personal one. He told me that when he gets paid, sometimes he goes to a licor store to cash the check. Then, he splits the cash in three parts, one goes to his pocket, the other goes to the LLC checking and the other goes to his personal checking. Who in the right mind, will suggest to this person to register an LLC and pay $300 yearly! Please comment on any of the above.

Let's say that he has had the LLC for five years and he decides to close it, do you think MD will force him to pay $300 for each year the LLC was active?

[jainen]

>>Who in the right mind, will suggest to this person to register an LLC and pay $300 yearly!<<

I don't know what you consider "the right mind" -- does it only refer to professionals who will work for clients who don't even attempt to comply with basic rules? In my opinion, registration is not for "nothing," but establishes the validity of the limited liability he wants for his operation. Basically I think the guy is a fool to let someone else work construction under his name with such a goofy setup. But he's already in collections, so if he doesn't have any money who else is likely to get sued when there's an injury with no Workers Comp? The financial advisor who endorsed the arrangement, that's who.

Anyway, it seems to me an odd thing to try to hide since presumably Maryland already knows about the LLC. Are you saying your state doesn't bother about most LLCs blowing off the filing requirements? All in all, I think this is a pretty weird discussion.

[Pacun]

Jainen,

I was hoping you were going to say that the LLC was killed by his actions and therefore, no filing was required.

When people come to my office, I ask them if they have a house, cars, inheritance coming, favorable law suits pending, etc. If this person had come to me, I would not have suggested an LLC because he doesn't need protection. His whole wealth are the cars.

"Basically I think the guy is a fool to let someone else work construction under his name with such a goofy setup."

Not really, he makes a little profit when he has the extra help and he issues a 1099misc to the other subcontractor (NOT employee).

[Pacun]

In Maryland you file the single member LLC the same as Federal (Schedule C). There is an annual Personal Property Tax Return that has to be filed with a $300 fee. This annual report has to be filed in order to maintain the LLC status. This applies to Corporations, Partnerships, Non-profits, etc. The web site for info: http://www.dat.state.md.us/

Diane

Diane,

I found this on that site:

Administrative Release No. 25

Subject: Income Tax Treatment of Limited Liability Companies

Revised: September 2008

IV. Maryland Income Tax Treatment of LLCs

A. In General

Effective January 1, 1997, the IRS promulgated final regulations which significantly change the way some entities are classified for federal income tax purposes. These “check-the-box” regulations generally provide that an eligible entity with two or more members may elect to be classified as a corporation or a partnership. An eligible entity with a single member may elect to be classified as a corporation or to be “disregarded” (treated as not separate from its owner).

Maryland follows these Federal regulations; therefore, the Maryland income tax treatment of an LLC depends on the classification of the entity at the federal level. If an LLC is classified as a partnership for federal income tax purposes, it will

be treated as a partnership for Maryland income tax purposes and must file a Pass-Through Entity Income Tax Return (Form 510). If the LLC is classified as a C corporation for federal income tax purposes, Maryland will also tax the entity as a C corporation and it will be required to file a Corporation Income Tax Return (Form 500).

Also, if an LLC has elected to be classified as a disregarded entity for federal income tax purposes, then the LLC will be treated as a disregarded entity for Maryland income tax purposes and will not have to file a separate Maryland income tax return. Instead, the profit or loss of that LLC will be reflected on the personal income tax return of the owner of the LLC. For example, if the owner is an individual, the income and loss of the LLC will be included on the individual’s Maryland income tax return. If the owner is a corporation, the LLC will be treated as a division of that corporation and the profit and loss of the LLC will be included on the corporation’s Maryland income tax return (Form 500).

[jainen]

>>the LLC will be treated as a disregarded entity for Maryland income tax purposes<<

I don't think anyone on this thread questions that fact. The discussion concerns an entirely separate matter.

[Pacun]

>>the LLC will be treated as a disregarded entity for Maryland income tax purposes<<

I don't think anyone on this thread questions that fact. The discussion concerns an entirely separate matter.

If MD Administrative Release No. 25 is active, that will answer my question.

I just tell my clients to keep the LLC separate and the consequences if they don't. If this person is not following that, my responsibility is that he reports all income. Since he only works for one company and he gets a 1099misc, I don't see a big issue.

[Lion EA]

But, he already organized as an LLC in Maryland, right mind or not. He should comply with MD's regulations until he dissolves the LLC. And, you should not be condoning his improper bookkeeping.

I worked with a NY LLC (maybe it was a corporation) with CT owners who had not been doing business through it for some time and wanted to dissolve it. We had to file all the missing returns with no activity -- and the owners had to pay all the annual fees -- to be allowed to dissolve the business in NY. If you think the LLC entity is of no use to him, then find out how he can dissolve it and do business as a sole proprietor. Explain it to your client and let him choose.

[Pacun]

Lion,

You are right. I will explain to him that since he doesn't have any wealth, he is protecting nothing by having the LLC. I will also wait for Diane to reply to my previous post and move from there. This is a new client and I am still deciding if I will be doing business with him.

[Lion EA]

Considering he does triple-entry bookkeeping instead of double, I'd send him elsewhere! You can't prepare a return that you know is wrong. And, you need to protect yourself. When he gets caught under-reporting his income, he'll say you told him it was OK.

[jainen]

>>he issues a 1099misc to the other subcontractor (NOT employee)<<

I understand that a lot of people read those financial newsletter columnists who say just put it on a 1099 and that releases you from all responsibility. But I never understood why people who actually work in taxation and related fields parrot such nonsense. Drywall happens to be a dangerous line of work with potential property damage as well as personal injury. When something goes wrong, the contractor is responsible because he brought in the subs, right? And when people start pointing fingers, well, after Enron us paperpushers can't hide anymore. And it's really helpful for us to show we did what we were supposed to do. That regardless of the tax treatment we maintained the Limited LIABILITY Company in proper form.

So file the Maryland personal property tax form with the annual LLC report already. And stop saying nonsense like "most preparers don't file LLC forms for MD." Of course they do. They HAVE to, it's the law. If you don't believe me, at least follow your OWN research that proved the same thing.

[Pacun]

Considering he does triple-entry bookkeeping instead of double, I'd send him elsewhere! You can't prepare a return that you know is wrong. And, you need to protect yourself. When he gets caught under-reporting his income, he'll say you told him it was OK.

Wow, you and Jainen seem confused. The LLC and himself work for only one employer. That employer gives the LLC a 1099misc. There is no way he will under report income. That's not the issue here. The issue is that his prior preparer never filed anything for the LLC and I do believe it is required for MD for INFORMATION PURPOSES and a $300 yearly filing fee. I am waiting for Diane to confirm it since she is in MD. Schedule C has been filed properly in the past.

[Diane]

Yes, I'm aware that Maryland follows the Fed rules. In my post I was referring to a single member LLC. But, it still has to file the annual Maryland Personal Property Return, as a Domestic Limited Liability Company, with the fee, no matter how it files its Income Tax Return (C Corp, S Corp, Partnership, or Schedule C).

Diane

[TAXBILLY]

I believe you are the one that's confused. Lion's and jainen's comments, in my opinion :~), are correct.

taxbilly

[Pacun]

"I believe you are the one that's confused. Lion's and jainen's comments, in my opinion :~), are correct."

Give me a good reason why you wouldn't deal with this client? He is reporting 100% and he doing everything correct, except that your colleague who filed his taxes, didn't file Personal Property Return, as a Domestic Limited Liability Company, with the fee. If he is mixing the money, he will not be covered by the LLC if a problem arises and I have told him that. Anyway he doesn't need any protection because he BROKE.

[Pacun]

Yes, I'm aware that Maryland follows the Fed rules. In my post I was referring to a single member LLC. But, it still has to file the annual Maryland Personal Property Return, as a Domestic Limited Liability Company, with the fee, no matter how it files its Income Tax Return (C Corp, S Corp, Partnership, or Schedule C).

Diane

Thank you Diane. With two little posts, you have helped me and have answered my question.

[Lion EA]

I thought your client was pocketing 1/3 of his business receipts he converted to cash, showing 1/3 in his personal account, and only running 1/3 through the LLC account. He should deposit all his receipts to his business account so it ties out to his books and tax return and (if all his clients send them) 1099-MISCs. And, I thought he was saying he wanted MD's liability protection but wasn't willing to pay MD's fees. He might decide not to pay your fees, also! I don't take clients that don't treat their business like a business, and that includes mixing business with personal funds as a "don't." With only one client, are you sure he's not an employee?

[Pacun]

I thought your client was pocketing 1/3 of his business receipts he converted to cash, showing 1/3 in his personal account, and only running 1/3 through the LLC account. He should deposit all his receipts to his business account so it ties out to his books and tax return and (if all his clients send them) 1099-MISCs. And, I thought he was saying he wanted MD's liability protection but wasn't willing to pay MD's fees. He might decide not to pay your fees, also! I don't take clients that don't treat their business like a business, and that includes mixing business with personal funds as a "don't." With only one client, are you sure he's not an employee?

You are absolutely right, he is not organized but he is not dishonest. That's where I come in and explain that he should not be mixing the money. He is willing to pay anything I say. My point is that the previous preparer, didn't file or told him to file Maryland Personal Property Return, as a Domestic Limited Liability Company, with the fee.