LLC Options

[erchess]

Depending on the answer my client and I may wish I had thought of this question before 3/16 but here goes. Client derives most of his income from working in the produce section of a grocery store in Alaska for approximately 35K a year plus benefits. On this pay he is able to own his own house and it will soon be his outright if he keeps paying on the mortgage the way he has in the past. But he doesn't want to work in a grocery store forever so he is taking online courses in computer science and working two side businesses. His employer is paying half his tuition and is talking to him about a job in their computer department when he graduates. He has in the past sold computers as a Sch C Business and installed computer networks under the umbrella of an LLC that has in the past elected to be taxed as an S Corporation. Late in 2012 I persuaded him to get with Legal Zoom which created the LLC for him and contribute to the LLC the assets of his computer sales business (which were minimal because he had no inventory just an online catalog out of which he was able to order machines from one maker for less than his customers could have) to the LLC and to indicate on Legal Zoom that henceforth the LLC will elect to be taxed as a Sole Proprietorship. Is that going to be ok or did the IRS expect us to file an election with them and if so is it too late to do do that? If worst comes to worst I will get the 1120S filed this week and pay the $94 I believe it is penalty for being late but obviously I would rather not do that. All thoughts appreciated.

[Koss]

I'm confused...

Did your client create a new LLC in late 2012?

Or did he somehow... create or amend the operating agreement for an LLC that was already in existence?

Did he file new documents with the Secretary of State?

I'm not following the sequence of events here.

A single-member LLC is treated as a sole prop unless an election is made. So if he formed a new LLC, and it has only one member, then it is a sole prop unless an election is made with the IRS.

But if somehow amended, modified, or reconstituted an LLC that was already in existence, and previously made an S corp election, then that election would still be in effect.

Did he get a new EIN? What about the name??

BMK

[erchess]

Not sure I know all the answers

to burtoin's questions.

EIN and name of LLC did not change. Nothing was filed with the IRS or the Sec of State or anyone at all except Legal Zoom. I gave verbal instructions to the client and he went to Legal Zoom and did what he thought I meant for him to do. My understanding is that legal zoom has some kind of endlessly amendable list of the LLC's assets and that Legal Zoom instructed him to keep that list up to date.

Are you saying that it is now or even in December of 12 already was too late for the LLC to elect to be no longer taxed as an S Corp?

If the answer to that is yes then do you know of any exception to the late filing penalty that might apply? 94 dollars is worth going to some but not a huge amount of trouble to save.

Would I be right in thinking that to pay only one penalty I have to get the late return in by midnight on 3/31?

[Gretel]

Not going into details. Of course you can revoke your S-Corp election any time, doesn't matter if corporation or LLC. However, this is a taxable event. Assets need to be sold/taken out of S-Corp. at FMV. Final S-Corp. tax return needs to be filed. If he does not have a FEIN for him as a sole proprietor, he needs to get it.

[JoshinNC]

Easy questions to resolve your issue

Did your client already have an existing LLC that was taxed as an S-Corp prior to you instructing him to go to Legal Zoom to create an LLC?

[erchess]

No Josh

Before I came on the scene he used Legal Zoom yo create an LLC and per their instructions he filed with the SOS and applied to the IRS for an EIN and to elect S Status. All that got acknowledged. I was the bone head who messed things up so I get to be the guy who fixes it. It is sounding to me as though the logical thing to for 2012 is get on a stick and file that S Corp and pay the penalty. Will the IRS object if I put all his business activity on the S Corp and just abruptly stop filing the Sch C? Can anyone confirm for me that if I let one April catch me with the S Corp unfiled that will be another $94 penalty?

[JoshinNC]

So he set the LLC/S-Corp up in a prior year, correctly requesting S status in a prior

year and you've been preparing Schedule C's all along using the EIC that was linked to the LLC/S-Corp?

[erchess]

Not Quite

I didn't know he existed until December of 12 so 12 will be the first year he is my client. I actually mis soke somewhat earlier. He only started the business in 12 but yeah he was planning on an S Corp and a C and I thought that was silly.