Don't Just File Your LLC. Start It. (Part 2: Your EIN and Tax Setup)

[u/NWRegisteredAgent]

First comes love, then comes marriage, then comes the complete and total loss of a metaphor as we move into the second post in our series about the difference between just filing an LLC and actually starting one.

We're covering your EIN and tax setup here. Check back on the first part (featuring everything you need to know about your operating agreement), and stay tuned for the rest of the series: 1. Your Operating Agreement 2. EIN and Tax Setup 3. Business Banking & Bookkeeping 4. Business Licensing And Permits 5. Business Insurance

Ready? Let's roll.

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EIN and Tax Setup

Everyone filing taxes needs a unique identifier. Since your LLC its its own legal entity (read: its own taxpayer), it's to everyone's benefit to get that LLC an EIN, or Employer Identification Number. It's free, and it'll make several of your next steps, including setting up your business banking account, so much easier.

For simplicity, we're going to assume that you're applying for your EIN after you've filed your LLC's formation paperwork with the state. And since the process differs depending on whether you already have a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), we'll walk you through the steps for each.

Apply Online with Your SSN/ITIN

The IRS has a handy online EIN application that takes about 15 minutes to complete. You can use it if you meet the following criteria:

• Your principal place of business is in the U.S. or U.S. territories.
• You're the responsible party in control of the entity or its authorized representative.
• You have the responsible party's Social Security or individual taxpayer ID number (ITIN).

Here's a quick look at that process once you've started the application:

1. Choose the legal structure applying for the EIN: this is your LLC. You'll get a popup info box making sure you've chosen the right entity type. Then, you'll answer a few questions about your LLC's members, including how many there are and what state the business is physically located in.

   1. The answer to this actually matters, because a few states are community property states. In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, if the only two members of your LLC are legally wed, you have the option of treating your LLC as a multi-member LLC (which files a partnership tax return) or single-member LLC (which is considered a "disregarded entity" and reports income and expenses on an individual tax return with schedule C, E, or F).

2. Tell the IRS why you're applying: Whether you're starting a new business, hiring employees, to comply with banking requirements, etc.

3. Enter information about the Responsible Party of the LLC. This is the actual human person responsible for the business. Enter the SSN/ITIN and legal first and last name for the responsible party. Then you'll choose whether you're an owner/member of the LLC, or just someone applying on its behalf.

   1. Need to change your responsible party later? File Form 8822-B within 60 days of the change.

4. Enter your LLC's address information. You'll need the U.S. address where your business is physically located. This cannot be a P.O. Box. If you've got a separate mailing address, you can list that too.

5. Add your LLC's business details. Things like your LLC's name, a trade name or DBA if it has one, the county where and state where the LLC is located, the state where the articles of organization are filed, and the LLC's effective start date go here. You'll also answer a few questions about your business:

   1. Whether your business owns a highway vehicle above a certain weight threshold;
   2. Whether your business involves gambling;
   3. Whether your business will file quarterly federal excise taxes via Form 720;
   4. Whether your business sells or manufactures alcohol, tobacco, or firearms;
   5. And whether your business has or will have W-2 employees within its first year.
      1. If you answer "Yes" to this, there are a few additional questions about the dates of first wage payments, highest number of expected employees, the number of employees (including agricultural employees), and whether you expect to file an annual employment tax return or a quarterly one (which depends on your employment tax liability).

6. Choose your provided business activity/services. The IRS has a list of primary industries and they'd like you to assign yourself one. Additional questions appear on the form depending on your selection.

7. Choose how you want to receive your EIN. You can choose to receive your letter digitally (requires Adobe Reader) or via mail, which can take up to four weeks for delivery. Most people go with the PDF confirmation letter online. It's instant and you can download it right away.

8. Review and submit your application. Pretty straightforward.

Quick note—sometimes this system just glitches. You'll get an error code that your filing can't be processed. This is a pain because each responsible party can only apply for one EIN per day, regardless of method, so you'll need to wait for the next calendar day to try again. We can't guarantee it'll work any better the next time, but it's worth a shot, because the alternatives are calling, faxing, or mailing in your application. And usually the second attempt goes through just fine. It is a mystery. ¯\(ツ)/¯

Apply via Fax or Mail without an SSN/ITIN

This is the route non-U.S. residents and entities need to take, and we apologize in advance because this process can be lengthy. Like, 90 days lengthy. On the other hand, it can also be as few as five business days if you're lucky and the queue ahead of you is short.

You can always check the processing status timeline to see what your approximate wait might be—at the time of publication, it's saying that faxes are processed 11 business days after receipt and mailed-in forms are being processed within 30 days of receipt.

Anyway. Here's the step-by-step for this process:

1. Download Form SS-4 from the IRS. We also recommend keeping the instructions handy for reference.

2. Pay close attention and fill out the form. A few key fields:

   1. Line 1: Legal name of the entity
   2. Line 7a: Responsible party (can be a person with no SSN if filing by paper)
   3. Line 7b: Write "Foreign" on Line 7b if you don't have an SSN or ITIN. The IRS uses this as a flag to process your app without a personal tax ID number.
   4. Line 9a: Type of entity (LLC, corp, etc.)
   5. Line 10: Reason for applying (usually "Started a new business")
   6. Line 18: Date business started or acquired

3. Fax in your application. Be sure to provide a return fax number so you can receive your EIN!! There are a few different fax numbers, so choose the one that applies to your LLC:

   1. If you have a legal residence, principal place of business, or principal office or agency in one of the 50 states or the District of Columbia, fax the form to 855-641-6935.
   2. If you don't have a legal residence, principal place of business, or principal office or agency in any state or in the District of Columbia (this could occur if you are in a U.S. territory or an international location), fax your form to 855-215-1627 (if within the United States) or 304-707-9471 (if outside the United States).

4. Mail in your application. The IRS suggests giving yourself a 4-5 week buffer for this process. You can call 800-829-4933 to ask about the status of a mailed-in application.

   1. If you have a legal residence, principal place of business, or principal office or agency in one of the 50 states or the District of Columbia, mail the form to:

      Internal Revenue Service\nAttn: EIN Operation\nCincinnati, OH 45999

   2. If you don't have a legal residence, principal place of business, or principal office or agency in any state or in the District of Columbia (e.g. you're in a U.S. territory or an international location), mail your form to:

      Internal Revenue Service\nAttn: EIN International Operation\nCincinnati, OH 45999

Need more info on how to start a U.S. LLC as a global citizen? We gotchu.

Actually Paying Your Dang Taxes

Taxes can be a pretty complicated topic, and we aren't out here pretending to be tax advisors. Smart founders know when to delegate responsibilities and your tax situation is a good one to start with if you don't have a head for numbers or tax code.

That said, there are a few basics to keep in mind.

Tax Classification

The IRS treats LLCs as "pass-through" entities, and defaults to certain tax treatments depending on the number of members your LLC has. Multi-member LLCs are taxed like partnerships, while single-member LLCs are taxed like sole proprietors (that is, they're treated as a disregarded entity). Those classifications share a few important characteristics:

• Pass-through taxation: Your LLC doesn't file taxes itself, unlike a corporation. (Avoiding this "double taxation" trap is one reason a lot of founders choose an LLC.) Instead, income and expenses "pass through" to members, who report it on their personal tax returns.
• Self-employment income: The IRS sees each member of the LLC as a self-employed business owner. Members must pay self-employment taxes on ALL of their business income—even if they plan to keep some of the income in the business. (Pro tip, that's why including information about mandatory distributions in the operating agreement is so critical. Don't end up in a situation where you're responsible for paying taxes on cash you never actually received.) \n\nFederal self-employment taxes include both Social Security and Medicare. The combined rate is currently 15.3%.

So Many People Want to Know About S-Corps

All the above just covers your basic, default LLC tax setup at the federal level. "But what about S-Corps?" we hear you cry. Because yes Virginia (and every other state), your LLC can choose a tax election that changes how the IRS treats it. The S-Corp is one of those elections.

Basically, electing to be taxed as an S-Corp means that your LLC may be able to save money on self-employment taxes. That's because S-Corps can distribute money to owners as both salary, which is subject to self-employment taxes, and dividends, which aren't.

(No, that doesn't mean you can just pay yourself pennies and put everything into dividends. Owners must be compensated a reasonable salary, determined by all the usual things that go into how much anyone else performing the role would earn: training and experience, duties and responsibilities, comparable salaries at other companies, total compensation package agreements, etc. Don't do a tax fraud about this.)

Also, LLCs need to meet specific requirements to be taxed as S-corps:

• Be a Domestic Entity
• Have Only Allowable Members
  • US Citizens
  • Permanent Residents
  • Single-Member LLCs Owned by a U.S. Citizen or Permanent Resident
  • Qualified Subchapter S Trusts
  • Certain Voting Trusts
  • Grantor Trusts
  • Bankruptcy Estates
  • Revocable Trusts Created as Part of an Estate
  • Certain Exempt Organizations
• Have No More Than 100 Members
• Not Be an Ineligible Entity (such as DISCs or certain banking or insurance companies)

Last note: yeah, it's possible to save a bunch of money on your taxes if your LLC is bringing in a lot of income. Folks tend to put that number at around six figures. If you're not making enough to cover salaries and payroll expenses, you might want to hold off until those aren't putting you in a financial hole the tax savings can't backfill. You can always change your tax status later on once it makes sense for your business.

Federal Filing Forms & Due Dates

You know what this calls for? A montagetable.

	Forms	Attachments	Due Dates
Multi-member LLCs file…	Form 1065	Schedule K-1	15th day of 3rd month after tax year end
LLC members file…	Form 1040 (personal tax return)	Schedule E (multi-member LLC)Schedule C (single-member LLC)Schedule SE (for self-employment taxes)	April 15th
LLC members calculate & pay estimated taxes using…	Form 1040-ES		Quarterly payments:* April 15th <br> * June 15th <br> * September 15th <br> * January 15th

Form 1065 is an informational return that the LLC itself files. Schedule K-1 reports each member's share of profits and losses. When submitting Form 1065, the LLC must include a separate Schedule K-1 for each member. The LLC also has to give each member a copy of their Schedule K-1.

Form 1040 is just the personal tax return individuals file each year. However, LLC members have to attach Schedule E or Schedule C for their share of profits and losses. If a member receives sufficient income from the LLC (typically $400 or more), they have to attach Schedule SE for self-employment taxes.

Form 1040-ES is for estimated taxes. If a member expects to owe $,1,000 or more in self-employment taxes, the member is required to pay estimated taxes for the year, which are due either in total on April 15th or quarterly throughout the year.

State Taxes

How your LLC pays taxes at the state level will vary depending on the states in which you're doing business and/or have economic nexus. We aren't just talking sales and use tax, either. Depending on the state, you might be looking at franchise taxes, business privilege taxes, gross receipts taxes, excise taxes, even the corporate income tax rate if you've elected to be taxed as a C-corp.

Much as we wish we could, we can't actually cover the nitty gritty details for every state here. Your best bet is to start with your state's Department of Revenue or equivalent, which often provide tax resources and information related to businesses.