When I started my business back in 1999 as a Sole Proprietor, I was excited to say the least. Things went smoothly, no major hassles, no extra stress (regarding reporting to the government), it was simple. Simple enough that I didn’t have to worry about spending more money to stay in business at the end of the year. I filed my taxes as a sole-proprietor along with my W2 and looked forward to a nice return by February.
In 2006, I had this brilliant idea to restructure my business as an LLC (Limited Liability Company) because I was told that would give me asset protection and give my business a more professional appearance. I thought, “that sounds like a good idea” why not. Then one day I saw a promotion, $99 to form a LLC by Legal Zoom. Gave them a call, went through the process which was easy and painless. By the end of the call I ended up paying $169 after all the so called miscellaneous fees.
The representative began walking me through the process; being a Register Agent and when I received my Statement of Intent (SOI) be sure Legal Zoom was listed as the RA; and when I get a letter from the Franchise Tax Board (FTB), how I wanted to be treated-select Single Member Manager (SMM). I don’t recall ever discussing any other filing requirements and surely nothing about annual fees to be paid to FTB. Being this was my first time ever filing for a LLC, I did what was asked of me. A few weeks later, I received my Certification notice in the mail.
Here it is the end of the year and I filed my taxes as I would normally, except now I had to include income from my business. No problem their. Both federal and state returns were mailed off and as usual, February-March I received a refund. There were never any notices from IRS or FTB suggesting to send or pay anything extra, so every year like clock work I filed as usual-file and get a refund. Then one-day, I was speaking to another business owner who said she too had an LLC. She began asking questions like how do file my return? and am I paying the $800 annual minimum fee? I said no, what is that? Shortly thereafter, I called FTB to find out more about this fee. Spoke to a representative and asked if I owed them any money. By this time it’s 2010 and was told no, you’re account is in good standing. So, I thought okay and didn’t worry about it.
However, just to be sure, every year thereafter I called FTB up until 2013. I was always told the same thing (you’re account balance is $0 and in good standing). 2013 was also a year which I didn’t file my taxes and stopped doing business under the LLC. A year later I received a letter from the Franchise Tax Board requesting my return for 2013, at which time I also notified them that I was no longer doing business under the LLC and wish to dissolve it. From that point on, I continued to get these letters about filings from previous years, which were submitted via certified mail. Finally I called and spoke to the ruddiest person who said “mam the last filing we received was in 2006”. So, I had to resend every return 2006-2015.
Two months later I got another letter, now I’m thinking what the …. Called again and finally an intelligent person answered and explained exactly what was missing. It wasn’t the full return, it was Form 568. At this point I was also informed the $800 Annual Minimum Fee was to be paid regardless of my income. I was LIVID. Legal Zoom failed to properly advise me as a Single Member Manager LLC. However, I take full responsibility for not doing the necessary due diligence and learn more about these landmines. As a result, I now have to pay $800 going back to 2006 plus penalties and other fees.
Take a page from my mistakes, learn to mitigate the landmines:
1. Annual Minimum Fee (AMF): No matter how you decide to be recognized (Single Member Manager, Partnership, or Corporation) or how much income earned or lack there of, the $800 AMF payment is required. So consider this before converting from a sole proprietor to LLC.:
- Will you be profitable first year and can afford to pay the fee.
- Convert if you are in a high risk business.
- Don’t become an LLC, just because it’s the trend. You can always purchase Professional Services Liability insurance through an insurance agency. Compare pricing and coverage before making a choice. This will provide asset protection same as an LLC.
2. Statement of Intent (SOI): Mark your calendar. Every two years a Statement of Intent should be filed with the Secretary of State. Make note of the Registered Agent when you receive the first SOI from Secretary of State. If you are applying to your home state, you should be listed as the agent and not Legal Zoom if you choose to go that route.
3. Form 568: Make sure to file Form 568 with every California Tax Return filing even as a SMMLLC, with or without income. It can be found and downloaded at www.ftb.ca.gov using the keyword search form 568.
4. Franchise Tax Board Communications: FTB will not send an invoice, voucher, or notice for due payment. Every year call FTB to inquire your status and balance.
5. Dissolving a Limited Liability Company (LLC): Dissolving an LLC can be tricky. There is a process which include being cleared by IRS, Secretary of State (in Good Standing), State Board of Equalization (BOE), and the Franchise Tax Board (FTB). If either of these agencies declare your account is unsatisfactory or suspended, your request will not be granted. Which means, you must first pay any owed fees. Something else to keep in mind, the Annual Minimum Fee will continue to be due until it is dissolved.
A few years ago I would haven’t have recommended the use of Legal Zoom’s online Entity library. However, since my last experience with them much has changed and so, I would suggested visiting their site www.legalzoom.com to familiarize yourself and make a more informed decision.