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Do-It-Yourself-Guide to Setting Up an Illinois Limited Liability Company
By Stephen L. Nelson, CPA, MBA (finance), MS (taxation)
This Do-It-Yourself Guide to LLC Formation was written to share basic information about formation of limited liability companies. The paper is not intended to replace the services of a competent legal, tax or business advisor. If legal or other expert assistance is required, the services of a professional should be sought. Furthermore, while the publisher has made every effort to offer the most current, correct and clearly expressed information possible, inadvertent errors can occur and the rules and regulations governing limited liability companies, accounting standards, and tax laws often change. Further, the application and impact of rules and laws can vary widely from case to case based upon the unique facts involved. Be careful! CIRCULAR 230 NOTICE: Under recently issued IRS regulations, we must inform you that any U.S. tax advice contained in the body of this white paper was not intended or written to be used, and cannot be used, by the reader for the purpose of avoiding penalties that may be imposed under federal tax law. By regulation, a taxpayer cannot rely on professional advice to avoid federal tax penalties unless that advice is reflected in a comprehensive tax opinion that conforms to strict requirements.
Copyright © 2007, 2008 by LLC Formation Explained web site
This document describes how you can, on your own and without the help of an accountant or attorney, set up an Illinois limited liability company. Specifically, the document provides step-by-step instructions for completing several legal and tax documents related to forming an Illinois LLC, including the LLC articles of organization, the IRS EIN application, and the C corporation election and S corporation election paperwork which some LLCs will want to file with tax authorities. Before that discussion, however, I want to talk briefly and in general terms about the legal and tax benefits of an Illinois limited liability company so you can understand better whether an LLC is appropriate in your situation.
The Twin Benefits of the Illinois Limited Liability Company
Limited liability companies deliver two huge benefits to Illinois business owners and investors. One benefit is a legal benefit and the other is a tax benefit.
Benefit One: Limited Liability…
The big legal benefit is that limited liability companies provide all the same liability protection as a corporation—but with much less red tape. A regular corporation, for example, requires regular stockholders meetings, a board of directors, regular board meetings, and of course records of all these activities and bodies. But a limited liability company doesn’t. This legal liability protection provided by an LLC can be extremely valuable. One local attorney I often collaborate with, for example, tells his clients that an LLC protects businesses and real estate investors from the worst case scenario—which in his mind is a “slip and fall” accident on the business’s or investor’s property. With an LLC as the property owner, so says my attorney friend, the “worst case scenario” is liquidation of the LLC. That liquidation means the people who own the LLC wind up with nothing—which isn’t good. But all the owners lose is what they’ve invested in the LLC. In comparison, without an LLC, the business owner’s or real estate investor’s “worst case scenario” if there’s a slip-and-fall accident is that the owner or investor can lose almost everything they own.1 In other words, the business owners or investors could lose not only their investment in the business or real estate property but many other assets.
A tangential side note: Even in the worst-case scenario, you typically can’t really lose everything. State and federal laws often protect individuals from the claims of creditors. For example, retirement savings may be protected, equity in a home, and even many personal belongings.
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you end up in dispute with a customer. And here’s another example. This second benefit of the limited liability company means that an LLC can choose to be taxed in whatever way is most favorable to the business. A limited liability company that is owned by one person can be a sole proprietorship. In other words. This decision to be treated as sole proprietorship would keep the business’s accounting very simple—and it would also mean that unique tax planning opportunities available to sole proprietorships can be used. if you personally happen to drop a hammer onto the customer’s head during the roofing project. drops a hammer on the customer’s head? The LLC may offer you some protection in this case. however. For example. the customer will almost certainly only be able to look to the LLC for payment of any damages. In this case. For example. Benefit Two: Enormous Tax Flexibility… A second benefit of LLCs relates to the income taxes a business pays or that investors pay. might decide to be treated as a sole proprietorship for federal income tax purposes. a C corporation. You may be able to buy an hour or two of time from a good local attorney and get all your LLC. or even an S corporation (if the LLC meets the S corporation eligibility requirements). sole proprietors can employ minor children and not pay federal payr oll taxes on the children’s Copyright © 2007. which unfortunately makes things even murkier. You want that sort of business liability protection.and liability-related questions answers. that’s good. A limited liability company that is owned by two or more persons can be a partnership. If you’re extremely concerned about the asset protection features of setting up and operating an LLC. And this consultation doesn’t need to be particularly expensive. one of your employees or subcontractors. Obviously. A limited liability company can be almost whatever tax entity it wants to be for income tax purposes. for example. However. the customer can probably look not only to your LLC for payment of damages related to the dropped hammer but also to you personally. The customer might reasonably argue that you should have done a better job managing the employee or subcontractor. or the owners.Let me issue a caveat here. a very small business with a single member (LLC owners are called “members”). a C corporation. What happens if someone working for you. your LLC probably won’t protect you from that sort of tort liability. unfortunately. assuming the customer prevails in some legal action. 2008 by LLC Formation Explained web site .2 2 Sole proprietors can rather easily take advantage of several unique tax planning opportunities. Perhaps they say your firm breached a contract to repair the customer’s roof in a specific fashion. get an attorney involved in your business or investment planning. that you’re a roofing contractor operating as an LLC and that. for example. An attorney knowledgeable in Illinois state LLC and business law can help you increase the liability protection that you gain from using an LLC for your business or investing. the investment. or an S corporation. Say. But you may still be personally responsible. You may not get as much legal liability protection from an LLC as you want or hope.
So an obvious question is “Why wouldn’t everyone become an LLC or limited liability company?” Perhaps predictably. It’s common that the right taxation choice for a new LLC can save the owner or owners of a small business $10. The most noteworthy feature of Subchapter C is that the corporation pays a corporate income tax on the business profits. An LLC may also increase your banking. The most noteworthy feature of Subchapter S is that the corporation doesn’t pay any corporate income tax on the business profits—rather.A larger business might decide to operate as a C corporation or as an S corporation3 in order to take advantage of some of the unique tax planning advantages of these entity choices. 2008 by LLC Formation Explained web site . Social Security and Medicare taxes paid on the owner’s profits. (The children may also be able to avoid income tax on their wages!) Sole proprietors may be able to easily claim the home office deduction. A C corporation. often lets businesses provide rich tax-free fringe benefits to employees including shareholder-employees. The big potential cost associated with becoming an Illinois LLC is the $500 initial startup fee plus the $250 annual filing fee.4 Note: While a limited liability company is not difficult to set up by yourself—you can have the paperwork done less than a quarter hour from now—you should be aware that paying a few hundred dollars to an accountant to pick the right taxation for your new LLC might be the best investment you ever make. For example. the business profit is allocated to the shareholders and they pay the income tax on their proportional shares of the business profit.000 annually. The Drawbacks of the Illinois Limited Liability Company When you consider the two big benefits of an Illinois limited liability company—limited business liability but with less red tape and tremendous tax flexibility—you have almost the perfect business entity choice. refer to the www. 4 For more information on how S corporations save their shareholder employees payroll taxes. 3 A “C corporation” is a corporation that’s taxed under Subchapter C of the Internal Revenue Code. An “S corporation” is a corporation that’s taxed under Subchapter S of the Internal Revenue Code. while the bank account for a sole proprietorship or informal partnership may be free if you keep a large-enough balance. the bank account for a limited liability company probably won’t be free.SCorporationsExplained. Copyright © 2007. And an S corporation often lets a business dramatically reduce the self-employment.com web site. accounting and insurance costs.000 to $20. Sole proprietors can also cover their family’s medical expenses through what’s known as a Section 105(b) medical reimbursement arrangement if they employ their spouse and provide health coverage to the spouse-employee and the spouse-employee’s family. even more each month. there are some costs and headaches associated with operating as an LLC. for example. The bank may charge $10. $20. wages.
You will need to print new letterhead. Here’s what you do: 1. 2008 by LLC Formation Explained web site . For example. For example. On the other hand. an LLC is uneconomical for very small businesses. you may spend money on publications like this. any business that’s producing profits that equal or exceed what the owner would earn if he or she worked as an employee for someone else probably should operate as an LLC.ilsos. Copyright © 2007. You may buy the services of accountants and attorneys. You can also file an Application for Reservation of a Name and pay $300 per name to reserve a name for 90 days. (Optional) Check if the LLC name you want is available. you may want to check if the LLC name you want to use is even available. the part-time business that generates a few thousand dollars of profit probably is not big enough or risky enough to shoulder the hundreds of dollars of cost (or more?) incurred in setting up and operating an LLC. The LLC economically reduces business risk and as an added bonus often saves the owners thousands of dollars a year in income or payroll taxes. I can’t give you a one-size-fits-all answer.While a sole proprietorship or informal real estate partnership may be able to keep its bookkeeping and income tax return preparation very simple. and envelopes (if you use these) that use the new LLC’s name in order to show the world that you’re now operating as a limited liability company. an LLC probably needs to file its own tax return if the LLC operates as a partnership. it’s worthwhile to note that an LLC may involve several hundred or even a few thousand dollars of startup expense. Forming the Illinois Limited Liability Company The actual steps you take to form an Illinois state limited liability company are almost comically simple. Finally. business cards. You can use the form found at http://www. As a first step. So where does all this leave you? How should you balance the big benefits of forming an LLC with all the costs and drawbacks? Unfortunately. In my opinion. The reservation of a corporate/LLC name is an option. A preliminary check of corporate name availability may continue to be conducted via telephone by calling (217) 524-8008. You’ll need to carefully consider the benefits and costs as they add up in your specific situation. I will share these thoughts. however. not a requirement. And this LLC tax return may cost anywhere from a few hundred dollars to a few thousand dollars annually. a C corporation or an S corporation.gov/corporatellc/ to check about name availability.
7. The URL. Enter your business or investment name onto the lines provided. If the LLC duration is perpetual.” For example. provide the latest date of the event. enter your name and address information onto the lines that ask for this information. Date of Dissolution If you know when the company will dissolve.C. 2008 by LLC Formation Explained web site . Provide Date State whether the Articles of Organization will be effective on the filing date or at a later date not to exceed 60 days after the filing date.cyberdriveillinois. (I used the example name.L.com/publications/pdf_publications/llc55.pdf 3. all of the following names should be acceptable: Acme Explosives Limited Liability Company Acme Explosives LLC Acme Explosives L.L. leave this blank. The name must include the phrase “Limited Liability Company” or one of the standard abbreviations. Download the Application to Form a Limited Liability Form from the Illinois Department of State’s LLC Forms web site. Accordingly. 4. and then print this form.”) Note that the name goes onto the first page the form in two places and onto the second page of the form in one place. Identify the name you want to use for your new LLC. Copyright © 2007.2. 5. or web page address. http://www.” or “L. Provide your name and address to the Secretary of State’s office Illinois wants to know the name and contact information for a real person within the state of Illinois who the state can contact if it has questions or concerns about an LLC’s operation or if legal documents need to be served. Write the purposes for which the LLC is organized This will be the transactions of any or all lawful business for which the LLC may be organized.C. “LLC. “Acme Explosives LLC. 6. for this form (see Figures 1 and 2) is as shown below.
2008 by LLC Formation Explained web site .Figure 1: Page 1 of Illinois LLC Articles of Organization document Copyright © 2007.
8. Figure 2: Page 2 of an example Illinois LLC Articles of Organization document. If the LLC has management vested in the members. 2008 by LLC Formation Explained web site . Copyright © 2007. If the LLC is managed by the managers. check box “a” and list the names and business addresses of the managers. check box “b” and list the names and addresses of the members. Determine the management style and list names.
Licensing a Business in Illinois As you probably know if you’ve worked or run a business in Illinois. Processing lead times vary. Many communities restrict advertising. Note that you can pay extra money to have your articles of organization filed in an expedited manner.gov/Businesses/register.htm or write or call at: Illinois Department of Revenue Central Registration Division PO Box 19030 Springfield. you must register with the IDOR. Second St.illinois. or manufacture goods. Illinois 62794-9030 1-800-732-8866 TDD: 1-800-544-5304 When the business name is different from the owner's full legal name. it takes several weeks to get your LLC certificate back from the Secretary of State’s office. some municipalities and counties impose their own taxes in addition to the state and federal taxes that most businesses are responsible for. Submit the LLC Applications After you complete the Articles of Organization document mail the document and a check for $500 to: Secretary of State Department of Business Services Limited Liability Division Room 351 Howlett Bldg 501 S. Springfield. regardless to the structure of the business. In addition. but in general. You can find the county clerk information at: Copyright © 2007. Contact your city or county clerk for information on local restrictions. IL 62756 You can also deliver your articles of organization in person. buy or sell products wholesale or retail. New businesses should contact their local revenue department to determine if additional taxes apply to their business activities. If you plan to hire employees. 2008 by LLC Formation Explained web site . You can find the information needed to register with the IDOR at: http://tax. the "Assumed Name Act" requires you to register the business name with your county clerk's office. regulate pricing.9. or require zoning permits. most business are required to be registered and/or licensed by the IDOR.
nelson@stephenlnelson. A final comment: Occasionally people write me and ask how one might complete the sample operating agreement. Note: The LLC operating agreements were available as word processing files from the same page you downloaded this document from. Ideally.state. a member or past member of several state bars (California. email me with your purchase information at steve. If you didn't get a copy of the operating agreement at the time you downloaded this document and you've recently purchased the document. The simple approach probably also reduces the legal liability protection you get from the LLC. Texas. intimately familiar with your business or investment. For a single member LLC operating agreement. Writing and Activating the LLC Operating Agreement You need an operating agreement for your LLC (regardless of how the LLC gets treated for income tax purposes) to govern how the LLC members interact with the LLC and with each other. The simple approach ends up saving you money.aspx You can also usually get local city business license information by calling city government offices in the town in which you plan to operate your business.http://www. etc. You also make any changes to the language you required.elections. You simply keep it for your records.il. I'll arrange for someone to email you the operating agreement documents.com. Practically speaking. start with boilerplate operating agreement language (like that provided in the sample). the single member signs the last page of the operating agreement and then a copy of the articles of organization or articles of Copyright © 2007. Accordingly. You and your attorney would then customize the document so it works for your specific situation.) and a graduate of Stanford Law School and Stanford Business School. you fill in the blanks with the LLC name. Florida. if at some point in the future you want to improve your liability protection. the formation state and the list of members and member contributions.us/ElectionAuthorities/ElecAuthorityList. Note that you do not file the operating agreement with the state or any agencies. many small business owners and investors end up instead using simple sample operating agreements as their "real" operating agreements. you would have a local attorney. Basically. This do-it-yourself kit includes sample single-member and sample multiple-member limited liability company operating agreements written by attorney Carl Baranowski. you should consult with a local attorney. 2008 by LLC Formation Explained web site .
however. the process for determining if your LLC needs an EIN is little complicated. you can't file an electronic return. you need an EIN to identify the partnership. make an electronic payment. For a multiple member LLC operating agreement. for your new limited liability company. the members add their names. The one exception to the preceding rule concerns a multiple member limited liability company which has a husband and wife as its only two members. identifies your business entity and often allows you to do things like open a bank account. If the husband and wife reside in a community property state. Single member limited liability companies treated as sole proprietorships If you have set up a single member limited liability company and you're planning to have the LLC treated as a sole proprietorship for income tax purposes. Until your EIN gets added to the permanent records. or pass an IRS Taxpayer Identification Number matching program. such an LLC is a partnership. the husband and wife may treat the multiple member limited liability company as a single member limited liability company--in which case the single member limited liability company rules (discussed next) apply. Getting an EIN for Your New Limited Liability Company You may need to get an Employer Identification Number. Multiple member limited liability companies treated as partnerships If you have set up a new multiple member limited liability company and will have the LLC treated as a partnership. Accordingly. and payroll tax returns. apply for business licenses. An EIN. and file any tax returns such as corporation tax returns. sometimes also known as a Federal Tax Identification Number. signatures and contributions to the operating agreement as Exhibit A and then a copy of the articles of organization or articles of formation filed with the secretary of state should be attached to the operating agreement as Exhibit B. partnership tax returns. or EIN. you need an EIN only if you are: Copyright © 2007. Why? You will need the EIN to file the partnership tax return. Technically. Caution: The IRS takes up to two weeks to make your new EIN part of its permanent records. apply as soon as possible! Unfortunately. if you do need an EIN. 2008 by LLC Formation Explained web site .formation filed (this is the form you've already filled out and filed with the secretary of state) would be attached to the operating agreement as Exhibit A.
irs.www4. The online EIN application is not available 24 hours a day. merely because: • • • you change the name of your business or you change your location and/or add other locations or you operate multiple businesses. to 12:30 a.m. Limited liability companies treated as C or S corporations If you choose to have your single member or multiple member limited liability company treated as a corporation--in other words.m. At the time I'm writing this (spring of 2008). You will not be required to obtain a new EIN for a single member limited liability company treated as sole proprietorship.m. Eastern time Fortunately.m.• • • subject to a bankruptcy proceeding or hiring employees or purchasing or inheriting an existing business. Eastern time Sunday 7:00 p.m. to 12:00 a. Go to the IRS website Go to the IRS online EIN application web page to begin the EIN online application: https://sa2. Applying for a New EIN using the Online EIN Application The easiest way to get an EIN number is through the interview-style. 2008 by LLC Formation Explained web site .Friday 6:00 a. however. All you need to have is Internet access and a current Internet browser What's more. online EIN application. treated as either a regular "C" corporation or an "S" corporation--you will need to get an EIN in almost all cases. you do not need special software to complete the online EIN application.m. you also do not need special computer skills to complete the online EIN application. to 9:00 p. Eastern time Saturday 6:00 a. the IRS makes its online EIN application available according to this schedule: Monday .gov/modiein/individual/index. thankfully.jsp Copyright © 2007. The online EIN application asks questions and you simply provide the answers by filling in the blanks and checking boxes and buttons. Here are the precise steps for completing the online EIN application: 1.
if you set up an LLC to operate an active trade or business. the online EIN application refers to LLC owners as "members. Go to the bottom of this page and click on the “Continue” button. the online EIN application takes you to a page that explains your choice. this step is easy: Simply click the “Limited Liability Company (LLC)" button. This page will explain that you will be considered a Single-Member LLC.Scroll to the bottom of the page and click on the “Begin Application” button. you will report your LLC's income and deductions on the 1040 Schedule C form. As such." Type the number of members into the field provided. you will be classified initially as a disregarded entity for federal tax return purposes. Go to the bottom of this page and click the “Continue” button. Copyright © 2007. as well as tax reporting requirements. Clicking on these definitions will not halt the progress of your application. Note: Different states and even different LLC operating agreements may vary in the names they use to describe LLC owners. Then use the drop-down box to select the appropriate state. For example. However. Provide information about the members of the LLC You'll need to specify the number of members in your LLC as well as the state where the business is physically located. This step is very important because each type of legal and tax structure has differing rules and regulations. In other words. Fortunately. If you set up an LLC to hold investment real estate. If you will only have one member in your LLC. for consistency purposes. you report your LLC's income and deductions on the 1040 Schedule E form. you can click on it to get a definition in a new window. Click on the “Continue” button. 2008 by LLC Formation Explained web site . After you indicate what type of legal and tax structure you've chosen for the new entity. If a word or phrase appears blue and underlined. Note: The IRS web site supplies definitions for most of the terms used in the online EIN application. Identify the legal and tax structure of your business entity. you will report your LLC income and deductions using your 1040 tax return. you will be brought to a page that says you need to confirm your selection. 2. 3.
5. 2008 by LLC Formation Explained web site .If you have more than one member in your LLC. Identify and describe a contact person of the LLC. Click the "Partnership" button. You need to designate a contact person--or what the online EIN application calls a principal officer. including name and Social Security or Individual Tax Identification Number. In the case of LLC’s taxed as sole proprietorships or partnerships. you will click the “Started a New Business” button. Click on the “Continue” button. Click “Continue” after you identify the type of primary member or principal officer. you should identify a corporation officer as the contact person. click on “Individual” button. 4. Click on the “Continue” button. For instance. if you use a middle initial. You will be taken to another page that explains what a partnership is and that asks you to confirm your selection. do not place a period after that initial. or principal officer. for example. If the IRS sends a letter to the LLC. owner or general partner. The IRS also wants information about the primary member or principal officer. they send the letter to the LLC in care of the person. Your choices are: § § § § § Started a new business Hired Employees Banking Purposes Changed Type of Organization Purchased Active Business In general. the IRS should contact when it has questions. In an LLC taxed as a corporation. explain why you are requesting an EIN. Don't use any punctuation other than a hyphen (-) and ampersand (&) in the name. you will be taken to a page that says your LLC will be considered a Multi-Member LLC and will be classified initially as a partnership for IRS tax purposes. To designate an individual member. Note that you can designate any member (owner) as the primary member. an individual typically acts as the contact. The IRS considers the contact person to be the individual or business responsible for tax matters. Copyright © 2007. State why you are requesting an EIN When prompted by the online EIN application.
Provide legal and trade name information about your LLC When prompted by the online EIN application. the county and state where the LLC is located. Copyright © 2007. apartment numbers.Note: If the contact person is an nonresident alien and therefore doesn't have a Social Security Number. if necessary. 7. Do not use any punctuation except for a hyphen and a back slash.S. you need to provide the name of the LLC. as appropriate.. Provide the LLC's business location. the person may be able to first obtain an Individual Tax Identification Number by completing a Form W-7. you will be taken to a page to provide that address. Finally. suite numbers. and the LLC start date. partnership or corporation--you need to provide a physical address of your LLC. click on the circle next to “Yes” when asked if the primary member is the owner. You will also be required to provide a phone number. Click on the “Continue” button. the trade name (if any). or managing member of the LLC. This address must be a U. If your address does not fit in 35 characters. member. Click the “Continue” button. Answer this question by clicking. Application for IRS Individual Taxpayer Identification Number form.e. etc). Note: IRS systems only allow 35 characters on the street address line. 6. the "Yes" or "No" button. 2008 by LLC Formation Explained web site . address and may not be a PO box. The final question on this page is whether you have an address different from the physical location where you wish to have your mail sent. The IRS will then validate the address you’ve provided with the United States Postal Service’s database and offer you an opportunity to make any changes to the address. No matter how your LLC is treated for tax purposes--sole proprietorship. If you do. the state where the articles of organization or formation are filed. the online EIN application asks if you expect to have employees that will receive W-2 forms in the next 12 months. please make sure you provide the most essential address information (i. 8. (For LLCs treated as sole proprietorships) Describe your employment plans If you're getting an EIN for a single member LLC that will be treated as a sole proprietorship.
The county and state will automatically be filled in by the computer based on the physical address previously entered. When prompted. or Inc. Corp. Indicate whether the LLC is subject to special federal excise taxes. address and start date information. Copyright © 2007. Read the questions and answer them. click on other and then click the “Continue” button. the online EIN application asks a series of questions about vehicles. State what your LLC does When prompted. If none of the categories fit. however. The LLC's legal name should not contain any of the corporation name endings. 9. Optionally. Click on the “Continue” button. such as Corp. tobacco and firearms. you can click on that category for a further explanation. and so forth. Click the “Continue” button. if any. you should verify that both of these bits of information are correct. LC. If you use a trade name. Finally. the online EIN application allows only two special punctuation characters: hyphen (-) and ampersand (&). 10. The name you provide as the legal name of your LLC should match the articles of organization or articles of formation. you will need to provide the LLC start date. the name may not contain an ending such as LLC. This is the date on which the entity began doing business or will begin doing business. quarterly federal excise tax returns. After you provide the LLC's name. identify the state where the articles of organization or articles of formation were filed. If you aren’t sure what a category includes. If you choose “Other” you will be taken to a second page of options. If none of these options fit. you can provide a trade name. type in what your LLC will do and then click the “Continue” button. gambling. For most people. again when prompted. However. 2008 by LLC Formation Explained web site . and alcohol. This is typically the same state as LLC's physical address. click on the “Other” button on this page. Use the pulldown menu to select a month and year. PLLC. the answer will be “no” to all four questions. Inc. A trade name or “doing business as” name is another name under which the business or individual operates.Again. choose a category that best describes your business.
If you choose to receive it online. after you determine the information is correct. For example. Tell the assistor you received an EIN from the Internet but can't remember it and they will assist you. the web address for the SS-4 form is: http://www. Note: The unique prefixes 20 and 26 identify the EIN as a number issued via the Internet. though. Print the summary page and check the information for errors. complete it. online EIN application described in the preceding paragraphs. and then mail or fax the completed SS-4 to the appropriate address or fax number.gov.com/products/acrobat/readstep2. Verify Your Information The last page of the online EIN application summarizes your information.irs. "Application for an Employer Identification Number. start a new application. 2008 by LLC Formation Explained web site . This may take up to four weeks." from the www. you will be able to view the letter immediately and it will not be mailed to you.html. But this program can be downloaded for free from: http://www. If you choose to receive the letter by mail. This process can take up to two minutes. Then.adobe.pdf The web address for the SS-4 form instructions is: Copyright © 2007. Note. Click on the “Continue” button. However. the IRS will send it to the mailing address you provided. If any of the information is incorrect. the IRS also provides other procedures for obtaining an EIN. call (800) 829-4933 and select EIN from the list of options in order to speak with an IRS employee. 12. At the time I'm writing this document.irs. you can download a paper copy of the Form SS-4.gov/pub/irs-pdf/fss4. the easiest way to get an EIN number is through the interview-style. State How You Would Like to Receive Your EIN Confirmation Letter You can receive your EIN confirmation letter online or by mail. If you forget your EIN number. that you will need to have the Adobe Reader program installed on your computer. Applying for a New EIN using the Paper SS-4 Form As mentioned.11. click the “Submit” button to receive your EIN.
http://www. many tax traps exist for the unwary and the careless. you file an 8832 Form5 with the Internal Revenue Service. To make the election to be treated as a C corporation. 5 6 You can download both the 8832 Form and the 8832 form instructions from the www. in the block labeled “Type Or Print. however. the LLC becomes. I want to issue this caution to you: Make sure you understand how C corporation taxation differs from sole proprietorship or partnership taxation before you elect to have your LLC taxed as a corporation. and EIN information.irs.m. a corporation. Before calling for an EIN. the street address. and the EIN you will have already been assigned by completing and submitting the SS-4.” you enter the name of the LLC. Provide the LLC’s name.com web site provides general information about taxation of corporations. The hours of operation are 7:00 a. By making an election to be treated as a C corporation. However.6 To complete the 8832 Form. At the very top of the Form (see Figure 2). C corporations offer their owners and shareholder-employees some wonderful tax planning opportunities (such as tax-free fringe benefits for all employees including shareholder-employees).10:00 p. While the 8832 Form is very simple. address. Electing to be treated as a C corporation will of course mean that your LLC is now subject to corporate income taxes. Copyright © 2007. Monday through Friday.gov web site and fill out the form as best you can before calling the number just given.m.irs.gov web site. The www. This simple form (refer to Figures 3 and 4 to see a completed version of the form) identifies the LLC making the election and then provides buttons you mark to indicate the desired tax treatment. . you really should retrieve a copy of the SS-4 form and form instructions from the www. at least in the eyes of the Internal Revenue Service. Electing C Corporation Treatment for a Limited Liability Company Both single-member and multiple member limited liability companies can elect to be treated as regular corporations. local time.gov/pub/irs-pdf/iss4.irs. follow these steps: 1. also known as C corporations. city and state.pdf Applying for a New EIN by Telephone You can also obtain an EIN immediately by calling (800) 829-4933. 2008 by LLC Formation Explained web site .FastEasyIncorporationKits.
Identify the owner of a single-member limited liability company. 3. You would not be using a "do-it-yourself" approach in that setting… Copyright © 2007. These boxes ask about limited liability companies owned by corporations that file consolidated tax returns. These boxes ask about previous entity classification election you've made using the 8832 form.2. 2b and 3 on the 8832 form. You’ve just set up a new LLC. Specify the type of election. Presumably. Note: You should be able to ignore the checkbox questions asked by boxes 2a. Note: You should be able to ignore the checkbox questions asked by boxes 5a and 5b. that should mean you've just setup the LLC and have not previously made an entity classification election. If your LLC has a single owner. obviously. 2008 by LLC Formation Explained web site . enter the owner’s name and taxpayer identification number into boxes 4a and 4b. Use the Type of Election checkboxes to indicate whether you’re specifying how a newlyformed entity should be classified or how you want an existing entity’s current classification changed. if you're reading these instructions. So what you want to do is indicate that you’re specifying the initial classification for this newly-formed entity.
2008 by LLC Formation Explained web site . Copyright © 2007.Figure 3: Page 1 of an example completed 8832 Form.
or single-member. treated as an unincorporated branch of the corporation. As a practical matter. If you’re electing to have your new LLC treated as a corporation—which is the only election here that makes sense—you check the first box labeled “A Domestic Eligible Entity Electing To Be Classified As An Association Taxable As A Corporation. This means that a single-member LLC owned by an individual and operating an active trade or business is. For example. Select the entity classification you want to use. if you want the election effective as of January 1. 2010. I have never experienced the IRS actually calling the person identified on line 9 even though I help clients make numerous entity classification elections every year. Specify the effective date for the election. each member who owned an interest in the LLC for the affected year should add their signature and name to the Consent Statement And Signature(s) area. 2008 by LLC Formation Explained web site . 2009. to have your new LLC treated as a corporation for income tax purposes in 2009. by default. Prove that the LLC members have authorized the election. you could also make the election sometime in 2009. 7.8 6. A mid-year election means that the LLC is a corporation for only part of the year. And single-member LLC owned by a corporation is. 6d. For example. 6b. the default classification rules mean that if you want a multiple member LLC to be treated as a partnership. 6c.”7 5. In other words. Use the Consent Statement And Signature(s) area to formally request the entity classification. Use box 8 to specify when the election is to be effective. Copyright © 2007. LLC is disregarded as an entity separate and apart from its owner. by default. you don’t have to make an entity classification election— the LLC is automatically treated as a sole proprietorship. 2009. Provide a contact name and telephone number. 6e and 6f) to select how you want the new LLC classified (see Figure 4). if you wanted to elect to have your LLC treated as a corporation for income tax purposes starting January 1. you need to make the election by March 15. Note that while it is technically possible to make the election by having 7 A one owner. treated as a sole proprietorship. Use line 9 to specify the person and telephone number that the IRS should call if they need more information. Note that you must make an entity classification election by March 15 of the year for which you want the election effective. These default classification rules mean that if you want a single-member LLC owned by an individual to be treated as a sole proprietorship. For what it’s worth. you don’t have to make an entity classification election—the LLC is automatically treated as a partnership. Use the Type Of Entity checkboxes (6a. A multiple member LLC is treated as a partnership by default. 8 You can make entity classification elections as early as twelve months before the effective date. Note.4. too. you enter 1/1/2009 into box 8. Similarly. that you can make an election effective as of some date other than the start of the year as long as you’re within the “Not more than 12 months early and not more than 75 days late” window.
Figure 4: Page 2 of an example completed 8832 Form. Copyright © 2007. that member should be authorized by either local law or the organizational documents to make the election.only one member sign and date the 8832 Form. 2008 by LLC Formation Explained web site .
Virginia. New Jersey. North Dakota. Missouri. Mail the 8832 Form. Ohio. Louisiana. The Form should go to the follow address: If your principal business. Illinois. Nevada. you can often use a copy of the 8832 Form and your certified mail delivery receipt to prove a timely election—even if the March 15th deadline is long past. Wisconsin Alabama. 2008 by LLC Formation Explained web site . Delaware. Oregon. In a nutshell. be aware that corporate tax returns are due on March 15th and not April 15th. Hawaii. OH 45999 Department of Treasury Internal Revenue Service Center Ogden. Montana. Kansas. Nebraska. Wyoming Then use the following mailing address to submit 8832 Department of Treasury Internal Revenue Service Center Cincinnati. Tennessee. If the 8832 Form isn’t processed or acknowledged by the IRS. In my experience. South Carolina. Michigan. Minnesota. Maryland. And. Washington.8. Idaho. the LLC becomes an S corporation in the eyes of the Internal Revenue Service. New Mexico. Texas. Arizona. Pennsylvania. North Carolina. In order to become an S corporation. Utah. Oklahoma. Colorado. South Dakota. second. A couple of other notes: First. an LLC must meet the same eligibility requirements as a regular S corporation. Georgia. By making an election to be treated as an S corporation. New York. also known as S corporations. New Hampshire. Mississippi. (1) all shareholders (and shareholder spouses in Copyright © 2007. Electing S Corporation Treatment for a Limited Liability Company Both single-member and multiple member limited liability companies can also elect to be treated as Subchapter S corporations. California. Massachusetts. Florida. you will also need to attach a copy of the 8832 Form to your first corporate tax return. Alaska. District of Columbia. Indiana. Vermont. the IRS service center regularly loses the 8832 Form. Kentucky. UT 84201 It’s essential that you mail the 8832 Form using certified mail with a delivery receipt. West Virginia. Maine. Arkansas. Rhode Island. Iowa. office or agency address is located in state of: Connecticut.
” you enter the name of the LLC. To complete and file the IRS Form 2553. in the block labeled “Type Or Print.9 However. many tax traps exist for the unwary and the careless. You also need to enter the date of incorporation (which should be the election date) and the state in which the LLC was formed. At the very top of the Form (see Figure 5).com. no corporate income tax. follow these steps: 1.S. California. The 2553 election date is the “incorporation date” because prior to the S Election.gov web site. At the time I'm writing this. Nevada. New Mexico. Idaho. Before I provide the step-by-step instructions for completing and submitting the election forms. city and state. To make the election to be treated as an S corporation.FastEasyIncorporationKits. make sure you understand how S corporation taxation differs from sole proprietorship or partnership taxation. like C corporations. 2008 by LLC Formation Explained web site . Copyright © 2007. (2) the “LLC-electing-S-Status” must have only one “class” of stock ownership treating all members the same way. as with C corporations.gov/pub/irs-pdf/i2553. address.irs. and EIN information. Get the IRS 2553 form from the www. the LLC is considered either a 9 You can get basic tax information on S corporations by visiting www. and (sometimes) substantial payroll tax savings.gov/pub/irs-pdf/f2553.S. the street address.pdf It's also not a bad idea.com and about corporations in general by visiting the http://www. S corporations.SCorporationsExplained. The precise web address for the 2553 instructions at the time I'm writing this is: http://www.irs. and certain trusts and charities. Enough said. to also grab an up-to-date copy of the form instructions. including pass-through of net operating losses. Provide the LLC’s name. Download the election forms. if you're going to grab an up-to-date copy of the form. Washington and Wisconsin) must consent to the S election.pdf 2. citizens or permanent residents.irs. you file Form 2553 with the Internal Revenue Service by March 15th of the year for which the S election is to take effect. and the employer identification number. (3) the LLC generally can’t have more than 100 shareholders (except that families of shareholders count as one shareholder for purposes of this test). I want to caution you about making the S election: Before you elect. offer their owners and shareholderemployees some wonderful tax planning opportunities. and (4) shareholders must generally be either U. the precise web address for the 2553 form is: http://www. estates of U. citizens or permanent residents. Texas.community property states like Arizona. Louisiana.
2008 by LLC Formation Explained web site . For example. Indicate the effective date of the election.sole proprietorship 10 (if it has one individual member) or a partnership (if it has multiple members). 3. For example. Note: You want to mark one of the applicable checkboxes in Box D if after receiving its EIN the LLC changed either its name or address. 10 It is possible to have an LLC that’s previously elected to be treated as a C corporation elect to be treated as an “S” corporation. And if you've just created a new LLC as of. that for single-member LLCs. Usually. There are special taxes that former C corporations can pay when they become S corporations. April 23 of the current year. However. you probably should not make this election using the “do -it-yourself” approach. if you're turning an LLC that has existed for many years into an S corporation. however. Consult a tax attorney or tax CPA if you want to convert a C corporation to an S corporation. say. you want to make the S election effective as of the start of the calendar year (if the entity has been in existence in previous years) or at the start of the entity's existence (if the entity has just been created in the current year). Use Box E to indicate when you want the S election to become effective. Copyright © 2007. you would probably want to make the S election effective as of January 1 of the current year. you would probably want to make the S election effective as of that April 23 date. for a single-member LLC. you could decide on August 1 to make an S election effective as of June 1. Note. In this case. you can choose to specify some other effective date as long as the effective date is not more than 75 days before the date on which you’re making the election. the LLC would be treated as a sole proprietorship for the first five months of the year (January through May) and then as an S corporation for the last seven months of the year (June through December).
Copyright © 2007. 2008 by LLC Formation Explained web site .Figure 5: Page 1 of an example completed 2553 Form.
(The IRS typically has special procedures for making these late elections. Sign the S election Form. however. or November. You shouldn't need to use this space if you're filing the election on time. you probably want to pay a lawyer. You need to provide each shareholder (or member) name and address in column J. Note: If you think you want a non-calendar fiscal year end. On page 2 of the 2553 form (see Figure 6).) 6. the IRS provides space for you to explain why you're filing a late 2553 election. K. you’re an LLC. you’re not a corporation legally. is that you not try to file a late election yourself. October. want to mark the Calendar Year option in box F. This tells the IRS who to call if they have questions about the S election. L. use columns J. or on the last day of September. Having a non-calendar fiscal year—an accounting year that ends in September. You may not have a “real” president or chief executive officer—after all. if needed.” 7. Name and get signatures from each shareholder and. shareholder spouse. you might as well identify yourself as the LLC “president. If you've already goofed up the S election deadline. Specify that the S corporation’s tax year will end on December 31.” or “treasurer. You must use column L to identify the number of shares that each shareholder (or member) holds. My suggestion. almost certainly. People use this space when they miss the deadline and then need to file the 2553 form late with the actual S corporation return. Accordingly. you probably. You’ll also need to sign and date the S election 2553 Form at the bottom of page 1 where the form asks for the signature and title of an officer. and N to name each shareholder in the new S corporation. 2008 by LLC Formation Explained web site . S corporation fiscal years can end on December 31. October or November—only complicates your tax accounting and produces no real benefit for you. and you want to have someone who understands the most current special procedures do the election. you shouldn’t make the S election yourself. You should confer with a knowledgeable tax practitioner. by the way. You need to have each shareholder sign and date the S election in column K. However.” “vice president. 5. M.4. Copyright © 2007. Enter your name and telephone information into Box H. Note: In the area beneath box H. certified public accountant or enrolled agent who specializes in S corporations to fix your election.
Nevada. Note: You won't need to worry about the third page of the 2553 form (see Figure 7). Washington. if any of your shareholders resides in a community property state (Arizona. Finally. Copyright © 2007. Idaho. Note that in the case of non-shareholder spouse. Texas. you can enter those percentages into column L. You need to enter each shareholder’s social security number into column M.If members don’t hold shares but only percentage interests. However.) As mentioned earlier in this ebook. New Mexico. enter the month and day that each shareholder’s tax year years. no stock is owned so a “NA” for “not applicable” can go into the Number Of Shares column and you can just put something like “spouse” into the Date column. the spouse of a shareholder must also sign the S election even if the spouse doesn’t own shares or an interest in the S corporation. you should include the blank third page in the envelope or in the fax you send the IRS simply to show them the page is blank. Wisconsin and sometimes Alaska and Puerto Rico). 2008 by LLC Formation Explained web site . (This should be December 31 in case of individuals. Louisiana. California.
Copyright © 2007. 2008 by LLC Formation Explained web site .Figure 6: Page 2 of an example completed 2553 Form.
Copyright © 2007. 2008 by LLC Formation Explained web site .Figure 7: Page 3 of an example completed 2553 Form.
Rhode Island. Delaware. if you act immediately. New Jersey. office or agency address is located in state of: Connecticut. Ohio. Mississippi. New Mexico. you can often use a copy of the 2553 Form and your certified mail delivery receipt to prove a timely election—even if the March 15th deadline has past. I want to share a handful of quick comments: 1. 8832 or 2553 Forms. Arizona. North Carolina. South Dakota. Illinois. Arkansas. 2008 by LLC Formation Explained web site . but nowadays. Oklahoma. Nebraska. New York. Maine. you can see which mailing address or fax number you can use for your state using the table below. OH 45999 Fax: (859) 669-5748 Department of Treasury Internal Revenue Service Center Ogden. Kentucky. Massachusetts. Fax or Mail the 2553 Form to make the federal S election. Louisiana. attempt to immediately resolve any problems by telephoning the Secretary of State’s office or the local IRS office. I used to suggest that people mail the 2553 form using certified mail with a delivery receipt. Michigan. Georgia. cross your fingers. I made this routine suggestion because if you mail the 2553 Form using certified mail with a delivery receipt and the IRS service center loses the 2553 Form. Utah. Maryland. Copyright © 2007. Wisconsin Alabama. Washington. UT 84201 Fax: (801)-620-7116 Some Closing Caveats and Comments Before I end this short booklet. Florida. Hawaii. Vermont. Certified mail with a delivery receipt isn't a bad idea. Indiana. Virginia.8. the IRS is so forgiving about late S elections that it's probably just as easy to fax the completed 2553 form. Iowa. you can often still fix a problem before the election deadlines expire. If your principal business. California. and then make a late election via mail if there's a deadline problem. Alaska. South Carolina. Minnesota. In any case. Colorado. New Hampshire. Montana. Kansas. Especially with the IRS. Idaho. District of Columbia. Tennessee. Pennsylvania. Oregon. Missouri. Texas. Nevada. If you have trouble getting the State of California to process your articles of organization or getting the Internal Revenue Service to process your SS-4. North Dakota. Wyoming Then use the following mailing address or fax number to submit 2553 Department of Treasury Internal Revenue Service Center Cincinnati. West Virginia.
our turnaround times tend to increase by a several days. Montana. just very honestly. give up on the “do-it-yourself” approach and. please be sure to include your telephone number and/or email address so we can contact you with any questions about your documents or comments. The “cost” to fouling up an S election. However… 6. CPA PLLC 8434 154th Ave. what I have done in this book is provide a “lite” version of the planning conversation that usually takes a couple of hours and for which I charge $500. attach a $300 check. but remember that the US Postal Service may take a few days to get your documents to us. And sometimes readers of my books (like QuickBooks for Dummies readers) do become clients. Nelson. 3. In other words. Also note that during tax season. I mentioned this before. Be aware that if your new LLC operates in states other than California. and the 8832 or 2553 election to check for errors. if your LLC begins doing business in. 4. It is truly foolish to save yourself $500 of attorneys’ fees but end up paying an extra $7. LLC experts in my office will do that for a flat $300 fee. a smart person who is careful can work through the paperwork themselves. county and city government agencies. but you also should not convert a C corporation to an S corporation without first consulting a tax practitioner because of some special tax considerations of going from C status to S status. But.2. 2008 by LLC Formation Explained web site . say.000 in payroll taxes. Typically. please. Don’t put assets that may appreciate (such as real estate) into an LLC that is or will be treated as a C corporation or an S corporation without consulting a knowledgeable tax attorney or a CPA. enlist the services of a local professional. can be several thousand dollars. But if you are having trouble. our turnaround times for this service are a few days. Most of the time. NE Redmond. If you want someone to review the LLC formation documents. Please understand that this booklet does not entitle a reader to free tax planning advice from the author. instead. the EIN application. I happily provide tax planning services to my clients. Copyright © 2007. do not waste time trying to fix a problem you do not understand. If you cannot resolve the problems yourself. 5. package up the documents you want us to check. and mail the entire packet to: Stephen L. you’ll also need to register your California LLC with the Montana Secretary of State’s office and get the appropriate business licenses from Montana state. for example. To take advantage of this offer. WA 98052 If you take advantage of this service. that you’ll probably have LLC registration and business licensing requirements to meet in those other states.