Single member LLC formed in mid-year

[Joe Btfsplk]

If someone operates as a sole proprietor for half the year, then gets a charter as an LLC and operates under the LLC for the rest of the year:
Should he file two Schedule Cs, using his SSN or the EI# he had used for the sole proprietorship, and using the EI for the LLC on the other Sch C?
OR
Should he file just one Schedule C? If so, would he show the EI # for the LLC on Sch C?

[Bird Legs]

Sched. C to LLC

Are there any employees for the first part of year? For the second half of year?

[Joe Btfsplk]

No employees

No employees. The LLC was formed mid-year. The owner gives flying lessons in his airplane as a sideline business and has a full-time job. He had no EI number until he formed the LLC. The IRS will probably assign him an EI number when they are informed that he has set up the LLC..

Another single-member LLC is pending for a client who has rental property which he had before forming the LLC. It would go on Sch E & there would be no EI# that would have to be entered on Sch E. Same question: would two separate Sch Es be appropriate?

[Armando Beaujolais]

Without an election to be taxed as a corporation the single-member LLC is disregarded for tax purposes, so there's no reason to file different forms for the pre/post LLC terms.

There are two EINs for the sole proprietorship, I'd just use the original one this year and pick up on the new one next year. I don't think the IRS is even going to look at the EINs if there are no employees.

[Black Bart]

Numbers

No employees. The LLC was formed mid-year. The owner gives flying lessons in his airplane as a sideline business and has a full-time job. He had no EI number until he formed the LLC. The IRS will probably assign him an EI number when they are informed that he has set up the LLC..

Another single-member LLC is pending for a client who has rental property which he had before forming the LLC. It would go on Sch E & there would be no EI# that would have to be entered on Sch E. Same question: would two separate Sch Es be appropriate?

Joe / I don't think IRS actually has any rules for this situation yet and maybe never will. I understand what you're saying -- that the first half of the year's income was earned under an individual's EIN or no number at all and then the last half was earned as LLCs. Still, if you're just worried about whether or not IRS will accept your forms, I think your airplane guy's tax return (and also the rental's) will "fly" either way you do it; whether filing two or four schedules. I've never seen IRS do a whole lot of matching up on schedule C/E other than for mortgage interest, 1099 income, and once on wages/941s. I guess if you wanted to be strict about it and keep the incomes separate for each time frame, then you could file four the first year and two the next. That would deflect any possible later criticism, but essentially, they'll go through either way you do it.

As far as IRS assigning the airplane guy an EIN, that's not going to happen unless he notifies them by applying for a number, because LLCs are creatures of the state and they aren't going to inform IRS that he has formed one.

FYI: When applying for an EIN for a sole proprietorship LLC now, IRS will ask if you already have an individual EIN. If you do, then they send one for the LLC only. If you don't, then they will assign you an individual number in addition to the one they assign to the LLC. But, they then advise you to use only the LLC number on your forms. I don't know what the idea is for giving you an individual number which they don't want or expect you to use.

[Joe Btfsplk]

EI for single-member LLC

. I don't know what the idea is for giving you an individual number which they don't want or expect you to use.[/QUOTE]
===
After reading all the responses, and considering that the Single-member LLC is a disregarded entity, it looks like no new EI number would be required unless there were employees.
If there were employees, and the entity was 'disregarded' the old EI number might be continued for payroll tax reporting. If the entity is disregarded it would probably be the same if it did not exist at all--and a nonexistent business would have no need for an EI number.
Does anyone disagree with my conclusions? I would be glad to know if I'm jumping to any incorrect conclusions.

[OldJack]

Even though it really doesn't matter for federal income tax purposes in this case, I would still file 2 separate 1040 Sch-C forms to document the LLC as a viable state entity for state lawsuit purposes. After all, how can you expect "liability protection" for the business under the LLC if you disregard the LLC on your tax papers. The fact that the IRS says file a Sch-C because it is a disregarded entity doesn't mean you "lump" the business in with other Sch-C businesses.

If it walks like a duck, acts like a duck.....

[BOB W]

I have to agree.....

..... with Old Jack. If you treat it different it will be different. Otherwise where will the liability begin when a lawyer gets a hold of your records. "Oh look at this, ladies and gentleman of the jury, the defendent made no distinction between his sole proprietorship and his LLC. There is no way for us to tell if he ever operated under his LLC and I say he didn't by the fact that the defendent made no distinction".

[Joe Btfsplk]

Your point is well taken

I now think it would be best to split the income whether or not it might create the potential lawsuit problem.

I was thinking only of the tax aspects, but I should have been thinking of all the pros and cons, not just the tax angle.

Better safe than sorry, and it would not result in any misstatement of the tax for the IRS to attack.

Thanks to everyone for your comments.

[DaveO]

I will echo Old Jack's position as well.

If you don't act like an LLC, or Corporation you can't be expected to be treated like one in a court of law. One of the first things the opposing attorney will want to see will be your books, records and tax returns. If the paper work is not up to date and appropriate then the show is over before it starts.

I always have to laugh when a client whose records are always a mess tells me he wants to incorporate or form an LLC for liability protection.

[Joe Btfsplk]

Incorporating without a set of books

For some reason a lot of people do incorporate or form LLCs with no knowledge whatsoever of accounting. Their records consist of check stubs, receipts for cash payments (sometimes) and their bank deposits. Often they use their personal checking account for both corporate/LLC business and for personal expenses.

A few of them, like some of my clients, will have their CPA keep the books, and some attempt to do it themselves with Quickbooks or even Quicken.

I only have one client who keeps his own books and does it more or less correctly. I believe he took elementary accounting in college.

I have one client who incorporated that never finished high school and I have no idea how he comes up with the information he provides me. I'm glad I don't have to verify what he gives me so, as far as I know, he gives me 100% accurate figures.

[veritas]

A

Years ago I ha a client who operated a Tavern as a sole proprietor. He also owned the building. So my suggestion was to incorporate and rent real estate back from corp. He kept excellent records and complied with the rules regarding corporations including minutes, formal lease and so on.

Well not long after a customer of his left the tavern and killed someone. Tavern was sued needless to say. All the plaintiff got was the insurance. The corporation saved his bacon.