Did You Form an LLC in 2010? Then Read This!

When you formed your LLC, chances are you or your service provider also applied to the IRS for a Tax Identification Number, which is also called a Employer Identification Number, or EIN. But, depending on your tax election, you may not be done yet. And, if you don’t make an IRS filing before March 15th, you could have tax trouble when it comes time to file your return!

When LLCs were first introduced, they were always taxed as one of two things: partnerships, for LLCs with 2+ members, or disregarded entities for LLCs with one member, or a married couple filing a joint return. But then something neat happened. The IRS introduced something called the “check the box” regulations, which (literally!) allowed LLC owners to check the appropriate box on a form to make other tax elections, too. Now you could have an LLC with S Corporation taxation, or even an LLC with C Corporation taxation.

So, why would you want to do that? Well, I can think of one reason right off the top: asset protection. LLCs offer better 2-way asset protection than Corporations do. When you own an LLC you can protect your ownership (and any assets in that LLC) from a credit much better than you can if you own a Corporation.

This asset protection is a huge draw for business owners and investors. Today, I’d estimate that about 90% of the entities I create for clients are LLCs, and of that amount, at least 50% are making a C or S Corporation election.

It’s this election that creates the problem. When LLCs file for a Tax ID number, they are automatically considered to be partnerships or disregarded entities, with a December 31st year-end. The IRS is happy to change that, but only if you (a) file the proper secondary paperwork, and (b) file that paperwork on time.

“On time” means filing a Form 2553 (to make an S Corporation election) within 75 days of the date of formation, or filing a Form 8832 (to make a C Corporation election) also within 75 days of the date of formation.

You Didn’t File on Time – Now What?

If you didn’t file on time, all is not lost. The IRS has a procedure in place for both tax elections. Basically you file a copy of the form with your very first tax return, and attach a note explaining why you didn’t file the form on time. It doesn’t really matter what your reason is – if you follow the procedure the IRS will accept the late election.

If you’ve already filed the first tax return for your business, you may still be able to make a retroactive tax election, but it will probably be a bit harder and you’ll have more hoops to jump through. As long as the return you filed was on the right form (i.e., you wanted to be an LLC taxed as a C Corporation, so you filed a corporation return on Form 1120), you’ve shown your intent to be a C Corporation, and the IRS will likely let it through. On the other hand, if you’ve already filed the first business tax return, and you filed it as a partnership or a disregarded entity, it’s going to be very hard – if not impossible – to get the IRS to let you withdraw that return and replace it with another one. You may be better off to make a new election for 2011 and start over.

Special Consideration for LLCs electing C Corporation Status

That brings me to another issue, which is particular to LLCs making a C Corporation election. If you formed your LLC in 2010, and filed the IRS Form 8832 to make the C Corporation election, you’ve probably still got the default year-end date of December 31st. To change that date – remember, C Corporations can pick any month they want – you MUST tell the IRS about the change. That is usually done by filing a request for an extension of time to file your tax return, and noting on the form your new fiscal year-end date.

The deadline for all businesses with a December 31st fiscal year-end to file a Request for Extension of Time to File A Tax Return is March 15th. That’s your Last Chance to fix any 2010 mistakes without a Lot of Effort

So if you formed an LLC in 2010, now is the time to take a look at your paperwork. Is it complete? Did you make the right tax election? Do you have things to do between now and March 15th to make sure everything is in order?

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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