Leveling Up: What to Do When You’re Ready to Form an LLC
Daniel T. Fahey | 09.24.19
For many business owners, there comes a time when it makes sense to move from a sole proprietorship or partnership to a more formal business entity, such as a limited liability company (LLC) or corporation. There are many possible reasons, but a common one is that the owners want to utilize the personal liability protection that those entities offer. Compared to a corporation, an LLC is often simpler and less expensive to operate, making it a very popular option for small businesses.
Once the decision is made, forming an LLC only requires filing Articles of Organization online or by mail with the Wisconsin Department of Financial Institutions. But there are other considerations the LLC’s owners (called “members”) should address early on to ensure the transition goes smoothly.
If the LLC has more than one member, the Internal Revenue Service (IRS) requires the LLC to have its own tax identification number, called an Employer Identification Number or EIN for short. This can be obtained on the IRS website or by completing and mailing in IRS Form SS‑4. Whereas each member may have previously reported business income on his or her own personal tax return, a multi-member LLC must use its EIN to file its own tax returns going forward. However, if the LLC has only one member, then by default the IRS disregards the LLC for tax purposes and the member can continue to report the business income on his/her personal tax return.
The LLC may also need to register with the Wisconsin Department of Revenue (DOR). This sets the business up for filing of state tax returns and payment of sales taxes (if making taxable sales) and withholding taxes (if the LLC has employees). Registration can be completed through the DOR website’s Business Tax Registration or by completing and mailing in form BTR-101, either of which gives the LLC a Wisconsin tax identification number.
If the LLC does or will pay wages to one or more employees, some additional considerations apply. For instance, the LLC will be required to obtain an EIN and file its own tax return regardless of how many members the LLC has. Additionally, the LLC is required to carry worker’s compensation insurance if its payroll exceeds $500 in any calendar quarter for services in Wisconsin. If certain conditions apply, the LLC will also be required to apply for an unemployment account through the Wisconsin Department of Workforce Development. The most common of these conditions is payment of wages of $1,500 or more in a calendar quarter.
It is also a good idea to establish rules to govern the LLC internally. Doing so provides stability to the LLC’s operations and prevents conflict between members. This is commonly accomplished in a document called an Operating Agreement. The following are some examples of topics addressed in the Operating Agreement: the names of the members and what their ownership interests in the LLC are, how decisions are made for the LLC, who can sign documents on the LLC’s behalf, how/when income is distributed from the LLC to the members, how/when an ownership interest can be transferred to someone else, how to calculate the value of a member’s ownership interest if that member decides to sell, and what happens if a member dies or gets divorced. An Operating Agreement is particularly important when an LLC has two or more members.
Making the move to an LLC can be a significant step forward for a small business. Addressing the above issues on the front-end will help make that transition a successful one.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.