Today TaxMama hears from Tommi in NC who asks, “When would be the best time to change from a sole proprietor to an LLC? Now? Or would it be best to wait until the first of the year, since I will have to get a new tax ID number (I will have employees)? Do I have to file a separate tax return for an LLC with employees? If I become an LLC now how would I file with two tax returns?”
Hi Tommi,
The year is halfway over, so you’re thinking that you may as well wait until next year to make the change, right?
Well, it all depends on why you want to convert to an LLC. If your goal is to reduce your liability exposure, then, today is the best time to do it. You never know when something will happen where your business may be held liable.
When you do make the change, you’ll be filing with your state to register a new corporation. An LLC is considered a corporation. So, yes, you will need a new federal ID number. And you can use The Company Corporation to set you up, inexpensively. https://www.myaffiliateprogram.com/u/compcorp/b.asp?id=2013
And if you’re already paying employees, it’s quite likely that you’ll need a new employer ID number for your state’s payroll system, as well.
How will you file tax returns for this new LLC? As an sole owner, you have three choices:
1) You can file it as part of your personal tax return, using a second Schedule C, with the new ID #. So
you won’t need a separate tax return. Or
2) You may chose to file as an S-Corporation. There are some advantages and disadvantages. Or
3) You may decide to file as a C-Corporation. There are some advantages. But if you don’t remove all the profits from the corporation by the end of each year – the taxes will be very high. They are 34% for personal service corporations.
Naturally, your last two choices will require separate tax returns. And the advantages and disadvantages are discussed in Chapter 3 of Small Business Taxes Made Easy. Looks like your business is growing!
Well done. But one last piece of bad news – the LLC will not protect you from liability if you personally did something wrong. It will protect you if your employees err, though.
And remember, you can find answers to questions about business entities and all kinds of tax issues, free. Where? Where else? At TaxMama.com
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