Jason KnottCPA & Tax Attorney

CPA, Tax Attorney, Tax and Legal Adviser to Startups and Established Businesses, Specialize in International Taxation

Recent Answers

NDA's are certainly a must have for new startup companies, especially if you are developing intellectual property. I would recommend consulting with an attorney that is licensed in your home state. Attorney's have very strict client confidentiality obligations, so you won't need an NDA with your own attorney, but you will likely need one for employees, vendors and other subcontractors.

There are a lot of options here, but I think you may have already found the best option which is setting up a holding company to own separate subsidiaries. It's not uncommon for a holding company to create a conglomerate which owns many different businesses across multiple industries, even businesses that compete against one another. In your case, it would make sense for the holding company to act only as a shell company that owns the stock of the underlying entities, rather than an entity that performs day to day management functions for both subsidiaries.

Based on the fact pattern you provided, it sounds like the entity would be classified as an investment club, so there are no licensing requirements, nor is the entity regulated by the SEC. If all of the LLC members are actively participating in the investment decisions, and you do not accept capital from outside passive investors, then you should be okay. However, you still need to be mindful of all state and local regulations that may apply to LLC's in your jurisdiction. I would recommend consulting an attorney to discuss your specific facts and circumstances.

No, this structure will not work. An S corporation is only permitted to have eligible shareholders, which include U.S. citizens, permanent residents, qualified subchapter S trusts, and certain types of estates, trusts and exempt organizations. S corporation shareholders cannot include C corporations, partnerships and other multiple member LLC's. If a C corporation owns S corporation stock through a single member LLC, the U.S. tax laws would disregard the single member LLC's ownership and consider the true owner of the S corporation to be the C corporation, and not the LLC.

Your company is required to file Form 1099-MISC for each person you paid rents of at least $600 during the year. There are, however, certain exceptions where some payments do not have to be reported on Form 1099-MISC. Generally, any payments made to a C corporation, S corporation, or an LLC treated as either a C or S corporation, are exempt from reporting. In addition, payments to a tax exempt organization are also exempt from reporting. You should request the non-profit organization complete and sign a Form W-9 which certifies its tax exempt status. You can certainly report the rents if you wish, but you are not obligated to report rents or other payments to tax exempt organizations.

If you're going to hire overseas engineers to perform work for your U.S. based company, you should be mindful of federal and state laws, as well as the laws of the foreign country where your engineers live and work. First, determine whether you want these individuals to be employees of your company, or merely serve as subcontractors hired to complete specific tasks. Generally, the subcontract relationship is easier from a compliance, reporting and tax perspective. When hiring a non-U.S. contractor, the contractor completes an IRS withholding certificate in order to verify the individual or company is not a U.S. tax resident. Foreign individuals sign a Form W-8BEN, a foreign corporation would complete W-8BEN-E, while a foreign partnership would complete a Form W-8IMY. So long as the foreign contractor is performing the work outside of the U.S., there should not be any U.S. tax withholding issues. It can become complicated if, on occasion, you have the developers travel to the U.S. to perform work. The nonemployee compensation could be considered U.S. source earnings and subject to federal and state taxes in the U.S.

Anyone can start a business overnight by simply creating a sole proprietorship. A sole proprietorship is a business conducted without the use of a legal entity, such as a corporation or LLC. You won't need a tax ID to start your business, but you may need to provide your social security number in order to receive payments for your services. Your customers will be required to collect an IRS Form W-9 from you before they can remit payment. The information on the Form W-9 is used so they can accurately complete and File Form 1099-MISC with the IRS. If you don't have an EIN, you'll have to provide your social security number on the W-9. It's highly recommended that you form a legal entity to conduct your business, for both tax and liability protection reasons. Your individual facts and circumstances will determine what type of entity is best suited for your business needs (e.g. corporation, professional association, LLC). A business license may be required as well, depending upon what locations you are conducting business. Most business licenses are issued at the state and local level, so you'll have to check the county in which you live, as well as the counties you will be traveling for your tours.

Yes, you need to report the income from your single member LLC. If you live abroad and qualified for the earned income exclusion, then you may be able to exclude a portion of your earnings. A U.S. citizen is required to report all of their gross income, derived from whatever source, even if they live outside of the United States. If you live outside of the U.S. and meet either the bona fide resident test, or the physical presence test, then you may be able to exclude a portion of your earned income from U.S. federal income taxes. However, you will not be able to avoid self employment taxes on the net earnings passing through from your single member LLC. The U.S. federal tax rules for U.S. expats can be incredibly complex. I would highly recommend you seek the advice of a competent U.S. tax adviser that specializes in U.S. expat taxation.

If you start a U.S. C corporation, you should file an annual Form 1120 income tax return each year. Under U.S. tax rules, every C corporation that conducts business should file a tax return, even if the corporation has no revenues, expenses or profits. It's also important to file income tax returns to preserve the net operating loss carry forwards. In the early stages of a company, you have mostly expenses which put the corporation into a net taxable loss position. Net operating losses are carried forward to subsequent tax years and can be used to offset future corporate profits. However, if you do not file corporate income taxes to report these losses, you will not be able to use them in future tax years, which could cost you a significant amount of income tax in the future. I highly recommend you consult with a qualified tax adviser to file the tax returns, as well as advise you on the deductability of certain expenses, and how you can plan to use tax losses in future years.

Yes, you definitely have a U.S. tax filing obligation. A single member LLC is a disregarded entity for U.S. federal income tax purposes. Although the entity itself does not pay federal income taxes, the single owner is responsible for reporting the income and expense of the LLC on his/her income tax return and paying the requisite income tax, if applicable. If the LLC does not generate any U.S. source income, and you do not conduct business in the U.S. through a permanent establishment, then the LLC probably does not owe any U.S. federal income taxes. However, the IRS has recently implemented new regulations which require single member LLC's to file a Form 5472 to report the activity of the LLC. This form is filed alongside a proforma Form 1120. It is absolutely critical that you file these returns. The IRS can impose a $25,000 USD penalty for noncompliance. I highly recommend you consult a competent U.S. tax adviser that specializes in these filings.

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