My Tennessee based client is currently using his SSN on W9s. i want to move to an LLC.
My client’s accountant is advising them not to due to the fact that we would then have to file in CA and it would cost $700 more to do so. Is that true?
No More Sole Prop
As always, remember I’m not a CPA, so you should consult with your CPA and lawyer on everything that you read here or anywhere. I often will read several sources on a subject and ask multiple CPAs. I’ve come to realize that tax related issues aren’t always black and white. That said, I’ll explain what I’ve learned…
1. You don’t need an LLC to have a Tax ID. Even if he doesn't have an LLC he can still get a tax ID number for his sole proprietorship if you guys don't want his social security number out there. https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein
2. Tax wise with Federal Gov't there isn't a difference between a sole proprietor and a single member LLC. The single member LLC is a disregarded entity and ends up flowing onto a personal return just like the Sole Prop.
3. That said often lawyers will recommend setting up an LLC and getting liability insurance to protect an individual's assets in case of a law suit; The corporate veil if you recall from Business Law 101. As is stands right now with a sole prop, if in the case of a significant law suit involving the touring business, personal assets (homes, cars, etc) are all open game. If you have LLC protection then those things can't get touched.
4. Regarding California or any state for that matter, my understanding is that if your business regardless of type (LLC, or Sole Prop) has nexus in the state then it needs to file a business tax return there. Nexus means that the business operates there, earns money there, sells things there.... basically what happens every time a show happens in a state.
That said, many bands making not much money play many states each year. Technically even the smallest of bands, if they operate in multiple states, are supposed to file a tax return there. But the administrative costs to do so would be too much for a small business. So most businesses don't do it because such little money is made in each state.
California is a state like any other. Regardless of entity type (LLC, Sole Prop, etc) if your business has nexus there then it is required to file a tax return there. So just converting to LLC wouldn’t trigger the need for a return there. Having nexus is the trigger.
It is true that if you did file a corporate tax return in CA as an LLC there would be a $800 minimum tax which you wouldn't have as a sole Prop. More info here. To the point in your email, a state having a fee is not unique to CA either. Most states, if you file there due to nexus, will have some kind of tax due.
5. Other costs for the LLC might include: the tax return is probably a bit more expensive. Most states have annual fees to keep the business active. Mass is $500/year for example. Obviously California is $800. Some states are minimal though. Virginia is $50 for example.
6. Touring in Canada and AUS the limits would be the same as a single member LLC or as an individual. You would tour in each place as an individual. Both places have limits under which no withholding is required and likely no tax return required… but that’s another post for another day.