The Tax Attic with Jerry Coon – October 1, 2009

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

Two business entities available when starting a business


I believe it’s important to write an article or two about the various business entities that are available to a person starting a business. With the economy remaining in the doldrums, good and experienced employees are still losing jobs. Some of these people will start or buy a business, predominantly due to the fact that there are no available employee-type jobs. Some information about the various business entities available might be of use.

The simplest form of business entity is called a sole proprietorship. A sole proprietor reports all of the income and expenses of the sole proprietorship on a Schedule C. This Schedule C becomes a part of the taxpayer’s Federal Form 1040. “Jerry’s Landscaping and Income Tax” would be an example of a sole proprietorship. This business registers its name at the county level and thereby protects that name. If Jerry’s Landscaping and Income Tax goes downtown Grand Rapids and registers that business name with the Kent County Clerk’s office, no one else would be able to confuse the public by operating a business in Kent County under that name. That doesn’t stop someone from operating a business in another county using that name, so the safe thing to do might be to also register the name in the surrounding counties. It doesn’t happen often, but it does happen, and those situations sometimes end up in the courts.

The next less simple type of business entity is called a Limited Liability Corporation (LLC). As the name implies, an LLC can potentially remove liability issues from the taxpayer level and encapsulate those liability issues within the LCC. If done properly, potentially only the assets within the LLC are subject to liability claims. I say “potentially” because I’m not an attorney, but my conversations with attorneys have led me in that direction. LLC registration occurs at the State of Michigan level by filing an Articles of Organization form. This gives the taxpayer the right to re-name his business to Jerry’s Landscaping and Income Tax LLC. It also protects this name at the entire state level. No one in Michigan would be able to operate under that name. It wouldn’t stop someone in another state from using that name. Perhaps someone right at the border might want to protect the name in both states, but that would be an exception. In somewhat of a quirk, even though the business is now called Jerry’s Landscaping and Income Tax LLC, it is still considered a part of the taxpayer’s individual Form 1040. The income and expenses are still reported on the taxpayer’s Schedule C.

The Internal Revenue Service considers an LLC a “disregarded entity.” In this instance, “disregarded” means that the IRS does not consider the entity a separate entity apart from the taxpayer. There is no special tax form that must be filed for the LLC. All of the income and expenses are reported directly on the taxpayer’s Schedule C. Even though the LLC has to file for and obtain a federal employer identification number upon formation, the IRS still maintains the policy that the LLC is not separate from the taxpayer. This policy applies to all LLCs, whether they are single-member or multi-member. Single-member LLC income and expenses go directly on the taxpayer’s Schedule C. Multi-member LLC income and expenses go directly on a Form 1065, a Partnership Return. I will explore the tax reporting differences between multi-member LLC or a partnership and a single-member LLC next week.

I have to say a word or two about the Detroit Lions finally winning a game. There are always coincidences in sports, and this win had one, too. The Lions scored 19 points and they had lost 19 straight games. They last won one year and nine months ago—there is that 19 combination again. Once they scored those 19 points, I thought I knew (or at least I hoped) they were going to win. If they had scored any other number of points, the losing streak was probably going to continue. Poetic justice demanded they end their losing streak by scoring the exact number of points in the losing streak. I didn’t really know for sure, though, until the clock ran out. After all, it’s just a small step from poetic justice to coincidental irony. I also think it’s going to be the first of many wins for Matthew Stafford. Go Lions. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive in Rockford.
His e-mail address
His telephone number is (616) 866-4704.

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