Who actually OWNS my company?
March 18, 2019 10:59 AM Subscribe
About three years ago, I set up a small business as an LLC. The intention was that it would be a partnership between myself and my wife, but I'm not sure we set it up that way. Now I'm trying to figure out who actually owns the company and how to fix it if necessary.
This was around the time my wife got pregnant with our daughter (the adorable but dangerously fearless Tiny Croft), and because there was a lot going on at the time, it seems like we really half-assed it. That's also why I don't even remember any of the fine details and have to rely on the few papers I have.
The only official documentation I have is the Articles of Organization from the State Corporation Commission and a letter from the IRS assigning our EIN. We never created an Operating Agreement (This is Virginia where one is not strictly necessary. Still, we should really have one.) The Articles list me as the Organizer and my wife as the Registered Agent. The IRS letter is addressed to "Naberius, MBR"
That's it. I mean the company more or less works. We have a company bank account and vendor accounts. We've been conducting business for about three years now. But my wife was talking to a CPA recently and came back with the idea that, if the company were really a partnership as opposed to a sole proprietorship, it would have to file its own separate tax documents. We've been treating it as a passthrough to our joint return.
So that has me wondering, and what little documentation I have isn't really helping. Is my wife a member/co-owner of the company? Is it all mine? For that matter, nothing actually lists the members. If I found myself in court right now, how could I prove I own the company, or that some rando off the street does not?
And if I am, as I suspect, the sole owner of the company, how would I go about adding a partner?
(Yes, I realize all this makes me look pretty hapless. I plead toddler. Without her, the company would be so much farther down the track. But also unnecessary. Life is full of trade-offs.)
This was around the time my wife got pregnant with our daughter (the adorable but dangerously fearless Tiny Croft), and because there was a lot going on at the time, it seems like we really half-assed it. That's also why I don't even remember any of the fine details and have to rely on the few papers I have.
The only official documentation I have is the Articles of Organization from the State Corporation Commission and a letter from the IRS assigning our EIN. We never created an Operating Agreement (This is Virginia where one is not strictly necessary. Still, we should really have one.) The Articles list me as the Organizer and my wife as the Registered Agent. The IRS letter is addressed to "Naberius, MBR"
That's it. I mean the company more or less works. We have a company bank account and vendor accounts. We've been conducting business for about three years now. But my wife was talking to a CPA recently and came back with the idea that, if the company were really a partnership as opposed to a sole proprietorship, it would have to file its own separate tax documents. We've been treating it as a passthrough to our joint return.
So that has me wondering, and what little documentation I have isn't really helping. Is my wife a member/co-owner of the company? Is it all mine? For that matter, nothing actually lists the members. If I found myself in court right now, how could I prove I own the company, or that some rando off the street does not?
And if I am, as I suspect, the sole owner of the company, how would I go about adding a partner?
(Yes, I realize all this makes me look pretty hapless. I plead toddler. Without her, the company would be so much farther down the track. But also unnecessary. Life is full of trade-offs.)
I owned a company that was incorporated in Delaware. Because I didnt live in state, I had to appoint a registered agent that was in state. In that case at least, registered agents are empowered to receive legal notices on behalf of your company. It does not grant or imply co-ownership.
The Articles of Incorporation are proof of ownership (yours). You should be able to amend this document for a small fee and put your wife's name on it as an organizer as well (as I recall you can have up to 5 names on it? Check with your state laws)
Also you dont neccesarily need a lawyer. You can look this up on your states government website. Or call the business registration office. Adding a partner or co-owner is a super common thing, and not hard to do.
posted by ananci at 11:35 AM on March 18, 2019 [1 favorite]
The Articles of Incorporation are proof of ownership (yours). You should be able to amend this document for a small fee and put your wife's name on it as an organizer as well (as I recall you can have up to 5 names on it? Check with your state laws)
Also you dont neccesarily need a lawyer. You can look this up on your states government website. Or call the business registration office. Adding a partner or co-owner is a super common thing, and not hard to do.
posted by ananci at 11:35 AM on March 18, 2019 [1 favorite]
Basically, if you can't work out the answers to these questions using self-help resources then you need to speak to a Virginia lawyer because explaining the substance of the law and/or those self-help resources in application to your facts amounts to legal counsel.
By way of illustration, an LLC and a "sole proprietorship" are mutually exclusive concepts. You don't have both.
posted by snuffleupagus at 12:59 PM on March 18, 2019 [4 favorites]
By way of illustration, an LLC and a "sole proprietorship" are mutually exclusive concepts. You don't have both.
posted by snuffleupagus at 12:59 PM on March 18, 2019 [4 favorites]
You can and maybe should have a lawyer who specializes in this go back and clean up the corporate records - just because something isnt clear right now doesnt mean that clarity cannot be achieved. (if, in this process, you discover that the corporate format you set up doesnt provide the kinds of protections/arrangements you wanted, better to do something about this now then wait until it became a potential problem).
posted by Exceptional_Hubris at 1:10 PM on March 18, 2019
posted by Exceptional_Hubris at 1:10 PM on March 18, 2019
By way of illustration, an LLC and a "sole proprietorship" are mutually exclusive concepts. You don't have both.
Not exactly. An LLC is a state concept. As far as the federal government and IRS is concerned, an LLC is a disregarded entity. A single-member LLC is taxed as a sole-proprietorship, by default.
So you can have an LLC for state liability that is simultaneously a sole proprietorship for income tax purposes.
Even more complicated, you can have a spousal partnership LLC at the state level which is taxed as a qualified joint venture sole proprietorship at the federal level.
And LLC rules vary from state to state since they only apply at the state level, not federal.
posted by JackFlash at 1:18 PM on March 18, 2019 [5 favorites]
Not exactly. An LLC is a state concept. As far as the federal government and IRS is concerned, an LLC is a disregarded entity. A single-member LLC is taxed as a sole-proprietorship, by default.
So you can have an LLC for state liability that is simultaneously a sole proprietorship for income tax purposes.
Even more complicated, you can have a spousal partnership LLC at the state level which is taxed as a qualified joint venture sole proprietorship at the federal level.
And LLC rules vary from state to state since they only apply at the state level, not federal.
posted by JackFlash at 1:18 PM on March 18, 2019 [5 favorites]
This FAQ from the IRS talks about married couples running a sole proprietorship and might be helpful as far as the tax question goes.
posted by toastedcheese at 1:32 PM on March 18, 2019
posted by toastedcheese at 1:32 PM on March 18, 2019
2nd Jackflash re llc vs sole proprietor.
As for who owns it I'm not a Virginian corporation expert Yada Yada but MBR is a standard abbreviation which means authorized member (as in member of the corporation who can file paperwork, sign legally etc) whereas registered agent is the person at such and such address and phone number with standard business hours who is fit to accept legal certified mail or summonses etc. That's nothing to do with your corporation. Eg I pay a service $125 a year to be my registered agent as I work from wherever I am. They get my mail, scan it, email it, and shred it. If I get certified email or (heaven forbid) a summons it goes there.
Final note, in Florida this is also deeply and well explained on the Florida department of corporations website. Here's the Virginia one. In Florida you just file a mended paperwork to add another MBR or MGR (Manager). In Florida and previously Ohio where I've done this stuff both had phone lines with available and helpful people. I learned all and manage my own between 2 or 3 phone calls and reading the websites...
posted by chasles at 2:09 PM on March 18, 2019
As for who owns it I'm not a Virginian corporation expert Yada Yada but MBR is a standard abbreviation which means authorized member (as in member of the corporation who can file paperwork, sign legally etc) whereas registered agent is the person at such and such address and phone number with standard business hours who is fit to accept legal certified mail or summonses etc. That's nothing to do with your corporation. Eg I pay a service $125 a year to be my registered agent as I work from wherever I am. They get my mail, scan it, email it, and shred it. If I get certified email or (heaven forbid) a summons it goes there.
Final note, in Florida this is also deeply and well explained on the Florida department of corporations website. Here's the Virginia one. In Florida you just file a mended paperwork to add another MBR or MGR (Manager). In Florida and previously Ohio where I've done this stuff both had phone lines with available and helpful people. I learned all and manage my own between 2 or 3 phone calls and reading the websites...
posted by chasles at 2:09 PM on March 18, 2019
Not exactly. An LLC is a state concept. As far as the federal government and IRS is concerned, an LLC is a disregarded entity. A single-member LLC is taxed as a sole-proprietorship, by default.
Yes -- there is a distinction to be made between "sole proprietorship" or "partnership" status in business entities (in which context you are not either of those things while also being a LLC), and for tax purposes. State law interacts with tax law here, including both entity and marital aspects, which is why it's probably best for OP to get some help straightening this out.
posted by snuffleupagus at 2:43 PM on March 18, 2019 [1 favorite]
Yes -- there is a distinction to be made between "sole proprietorship" or "partnership" status in business entities (in which context you are not either of those things while also being a LLC), and for tax purposes. State law interacts with tax law here, including both entity and marital aspects, which is why it's probably best for OP to get some help straightening this out.
posted by snuffleupagus at 2:43 PM on March 18, 2019 [1 favorite]
But my wife was talking to a CPA recently and came back with the idea that, if the company were really a partnership as opposed to a sole proprietorship, it would have to file its own separate tax documents. We've been treating it as a passthrough to our joint return.
Your CPA is giving you good advice. You can have an LLC, but have it taxed as a sole proprietorship. The notion that the two are mutually exclusive is incorrect and could cost you money.
1. The simplest arrangement for your LLC is to be taxed as a sole proprietorship owned and operated by you. In that case your CPA just has to fill out one Schedule C for you that is attached to your Form 1040. Business profits pass through to your joint Form 1040.
2. The next simplest arrangement would be as a qualified joint venture with your spouse. In that case you both treat it as a jointly owned sole proprietorship in which you each fill out a Schedule C and attach both to your joint Form 1040. You split all revenue and costs according to your agreed shares or contributions to the business. The difference here is that your business income is split between you so that both of you have contributions to Social Security and receive credits to both of your individual Social Security accounts. This may or may not be an advantage or disadvantage. Your CPA must make the qualified joint venture election on your 1040. To a first approximation, your total taxes will be the same as the single person sole proprietorship above. Business profits pass through to your Form 1040, but you will each be paying and getting credit for half the Social Security taxes. This shouldn't be too much extra work for your CPA since he can just clone the two Schedule C forms, each with half the amounts but two different names. If you are both working and contributing to the business this would be the fairest arrangement since you both get social security credits (just my opinion).
3. The most complicated arrangement would be a true partnership. In that case your CPA has to fill out a Form 1065 partnership tax return, and two Schedules K-1 so that the business profits pass through to your joint Form 1040.
Note that all three of these arrangements (generally) end up with pretty much the same total taxes paid as all of the business profit passes through to your Form 1040. The only real difference is the amount of paperwork and cost of tax preparation, with the first being cheapest and the last being most costly. Your CPA can advise.
There is no real need to have a more complicated partnership arrangement except if an ownership dispute arises in the event of divorce. You may want to consult a lawyer about that risk. But a qualified joint venture may also be sufficient.
posted by JackFlash at 4:52 PM on March 18, 2019
Your CPA is giving you good advice. You can have an LLC, but have it taxed as a sole proprietorship. The notion that the two are mutually exclusive is incorrect and could cost you money.
1. The simplest arrangement for your LLC is to be taxed as a sole proprietorship owned and operated by you. In that case your CPA just has to fill out one Schedule C for you that is attached to your Form 1040. Business profits pass through to your joint Form 1040.
2. The next simplest arrangement would be as a qualified joint venture with your spouse. In that case you both treat it as a jointly owned sole proprietorship in which you each fill out a Schedule C and attach both to your joint Form 1040. You split all revenue and costs according to your agreed shares or contributions to the business. The difference here is that your business income is split between you so that both of you have contributions to Social Security and receive credits to both of your individual Social Security accounts. This may or may not be an advantage or disadvantage. Your CPA must make the qualified joint venture election on your 1040. To a first approximation, your total taxes will be the same as the single person sole proprietorship above. Business profits pass through to your Form 1040, but you will each be paying and getting credit for half the Social Security taxes. This shouldn't be too much extra work for your CPA since he can just clone the two Schedule C forms, each with half the amounts but two different names. If you are both working and contributing to the business this would be the fairest arrangement since you both get social security credits (just my opinion).
3. The most complicated arrangement would be a true partnership. In that case your CPA has to fill out a Form 1065 partnership tax return, and two Schedules K-1 so that the business profits pass through to your joint Form 1040.
Note that all three of these arrangements (generally) end up with pretty much the same total taxes paid as all of the business profit passes through to your Form 1040. The only real difference is the amount of paperwork and cost of tax preparation, with the first being cheapest and the last being most costly. Your CPA can advise.
There is no real need to have a more complicated partnership arrangement except if an ownership dispute arises in the event of divorce. You may want to consult a lawyer about that risk. But a qualified joint venture may also be sufficient.
posted by JackFlash at 4:52 PM on March 18, 2019
The notion that [an LLC and sole proprietorship] are mutually exclusive is incorrect and could cost you money.
This is as incorrect as regards business entities themselves as it may be correct regarding their taxation. I'll leave it at that, as it does sound like OP is in fact more interested in the tax usages of these terms, regardless of the phrasing regarding the entity's "ownership."
posted by snuffleupagus at 5:14 PM on March 18, 2019
This is as incorrect as regards business entities themselves as it may be correct regarding their taxation. I'll leave it at that, as it does sound like OP is in fact more interested in the tax usages of these terms, regardless of the phrasing regarding the entity's "ownership."
posted by snuffleupagus at 5:14 PM on March 18, 2019
The OP's question - who owns the company? - is a matter of state law and should be answered by a Virginia lawyer. In most states, the answer is: whatever the Operating Agreement says. So that would still be to be determined.
Tax issues for Federal taxes are Federal issues. The answer there is that there is a presumption that the LLC is a pass-through entity. The owner can choose otherwise, by making an election, but almost no one does that.
It is not that the LLC will be taxed itself. Rather, it will file its own form K-1 to disclose to the owners what their share of income and expenses is. See this Investopedia link for more details. With one owner, or a husband and wife as sole owners, filing jointly, the answer is the same at any rate. There is nothing to divide. You declare all revenue and all deductions as you would with a sole proprietorship.
posted by yclipse at 4:17 AM on March 19, 2019
Tax issues for Federal taxes are Federal issues. The answer there is that there is a presumption that the LLC is a pass-through entity. The owner can choose otherwise, by making an election, but almost no one does that.
It is not that the LLC will be taxed itself. Rather, it will file its own form K-1 to disclose to the owners what their share of income and expenses is. See this Investopedia link for more details. With one owner, or a husband and wife as sole owners, filing jointly, the answer is the same at any rate. There is nothing to divide. You declare all revenue and all deductions as you would with a sole proprietorship.
posted by yclipse at 4:17 AM on March 19, 2019
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posted by praemunire at 11:31 AM on March 18, 2019 [2 favorites]