New California LLC Statement of Information Forms – Don’t be caught unaware!

By: Tamara B. Pow

Will your LLC be suspended for failure to file the Statement of Information because you use an outdated form?

In May of 2016 the California Secretary of State published a new form of Statement of Information for Limited Liability Companies (LLCs) . Filing the correct form, on time, is critical if you don’t want your LLC to be suspended.

The Secretary of State does not revise its forms often, but when it does, it is critical that business owners be made aware of the changes and file the correct forms. The Secretary of State will reject outdated forms, potentially causing delays and additional expenses. In May of 2016 the California Secretary of State revised the LLC Statement of Information form which had been in use since January of 2014. Here are some things you should know about LLC Statement of Information Requirements and the new forms:

  • There are two different LLC Statement of Information Forms – the LLC-12 for the initial filing and follow up filings that include changes to the last filing, and the LLC-12NC form which is a much more simplified form for LLCs that need to satisfy the filing requirement but do not have any changes to make to the information on the previous filing.
  • The new LLC-12 only has room to list one manager or member. If the LLC is managed by more than one manager or member, the LLC must include attachment pages.
  • You should always obtain a copy of the filed Form LLC-12 when you file it. The cost of obtaining a copy of the face page is $1.00, plus each attachment page increases the cost by $0.50.
  • The initial filing is due 90 days after the entity’s registration date.
  • The periodic filing is due every two years based on the LLC’s registration date. If the LLC was registered in an even year, it is due the next even year. If it was registered in an odd year, it is due the next odd year. The filing period includes the month of registration plus the immediately preceding five months.
  • The filing fee is $20. There is no fee to file a Statement of Information outside the normal filing period in order to update information changes for the LLC, such as changes to the address or the agent for service of process.
  • The Agent for Service of Process listed on an LLC’s Statement of Information should be aware their name and address is a public record, open to all, and listed on the Secretary of State website. The addresses of the LLC, and its managers or members listed in the filing are also public record.
  • The form can be rejected if the details are not correct. Make sure the company name, filing number, jurisdiction and other details are exact, including each comma.
  • The penalty for failing to file a Statement of Information by the due date is $250.00.
  • You can mail the form to the Secretary of State for filing, but if you need proof of filing any time soon, you should deliver it in person to the Sacramento office. To avoid the trip to Sacramento, the company can send the form and the check for copies to a filing agent in Sacramento to delivers it on the LLC’s behalf.

Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including limited liability company formations, operations, sales, conversions and dissolutions. Her consistent and extensive work with LLCs keeps her up to date when advising owners of LLCs and other business entities of Secretary of State updates and other changes in the legal requirements of maintaining business entity liability protection.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Beware of an Inadvertent Tax Termination of Your LLC

By: Tamara Pow

A limited liability company (“LLC”) can terminate for tax purposes even though it has not been dissolved with the California Secretary of State , resulting in potential tax consequences for the members. Members should be aware of when this could happen, the tax consequences that could result, and potential planning opportunities to avoid it.

What causes a tax termination? Under Internal Revenue Code Section 708, an LLC terminates for tax purposes in two different circumstances. First, when it ceases to do any business. If the LLC’s primary business is abandoned, an LLC will not terminate if it is still doing any business. However, if all business is discontinued, the LLC will automatically terminate on the date it is wound up and all assets are distributed to the members. Second, an LLC will terminate for tax purposes if fifty percent or more of the total interests in capital and profits of the LLC is sold or exchanged in any 12 month period. This can be the result of one sale or multiple sales, but multiple sales of the same interest during the same 12 month period are not aggregated.

What is the effect of a tax termination? The tax termination of an LLC results in a deemed distribution of the LLC assets to the members in proportion to their percentage interests, and a recontribution by the members of those assets to a new LLC. The LLC’s taxable year closes for all members as of the tax termination. This results in the LLC having to file two short year tax returns for that year. It could also result in bunching of LLC income on the members’ tax returns. Also, members may recognize gain if the amount of money deemed distributed to them exceeds their basis in the LLC. ( Click here to see my blog on LLC basis.

Can members avoid a tax termination? With careful planning, an LLC may be able to avoid a tax termination. Members can consider dividing sales of membership interests into two sales that are more than 12 months apart. Members can also consider reducing the selling member’s interest in either capital or profits before the sale through a distribution or an amendment to the operating agreement. Members can also avoid a tax termination by structuring the transaction as the liquidation of a member rather than a purchase by other members.

For any change in ownership interest in an LLC, the members should talk to their tax advisor in advance to determine if the change could result in a tax termination, and if so, whether that tax termination would cause adverse tax consequences.

Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including LLC formations, operations, transfers, conversions and dissolutions. Her tax background, including time as a tax consultant at Price Waterhouse, LLP, as well as her MBA and real estate brokers license help her in advising owners of LLCs and other business entities.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this articles should be addressed directly to Strategy Law, LLP.

Crowdfunding – Is this the deal for you?

By: Robert Hawn

If you are an emerging growth high technology start-up , or a closely-held small business, you’ve heard of crowdfunding. Crowdfunding is commonly used to describe an approach to fund raising over the internet, often characterized by small investment amounts by large numbers of people. Recently, the Securities and Exchange Commission enacted its Regulation Crowdfunding. You can find all 685 pages of the release discussing the Regulation, and the Regulation itself, at https://www.sec.gov/rules/final/2015/33-9974.pdf . In this blog, we’ll focus on the requirements concerning issuers.

Under the Regulation, an issuer can raise a maximum of $1,000,000 through crowdfunding in any 12-month period from any person. The offering can’t be conducted by your company directly, however. Instead, it has to be conducted through a broker-dealer or online portal registered with the SEC and a member of the Financial Industry Authority, or FINRA, or other national securities association registered with the SEC. To see if a broker-dealer is properly registered with FINRA, check http://brokercheck.finra.org/ , and to check if a portal is properly registered with FINRA, check http://www.finra.org/about/funding-portals-we-regulate .

There are some eligibility requirements that can disqualify an issuer. These include, among others, companies that don’t have a specific business plan (or whose plan is to engage in a merger or acquisition with an unidentified company), issuers that violate so called “bad boy” rules, and companies that have failed to satisfy annual reporting required by Regulation Crowdfunding.

One major requirement facing issuers under the Regulation is the need to prepare a disclosure statement. Although not as extensive as the type of statement required for an SEC registered offering, the requirements are significant. Items that must be disclosed pertain to the offering itself as well as the issuer. Offering related items include, among other things, the desired amount of the offering, the deadline for reaching it, whether investments over the desired offering amount will be accepted, the price of the securities, how the proceeds will be used, and material risks associated with the investment. Issuer related items include, among other things, a description of the business and its financial condition, information about 20% owners, members of the Board of Directors of the issuer, and officers, information concerning transactions between the issuer and related parties, and a description of the issuer’s ownership and capital structure.

The disclosure statement must also include financial statements prepared in accordance with generally accepted accounting principles as applied in the US. The financials must cover the shorter of the immediately preceding two fiscal years or the period since inception. The review the financials have to undergo depends on the amount of the offering:

  • If the current offering plus previous offerings under the Regulation are $100,000 or less, the financials must be certified by the principal executive officer and accompanied by certain information from the issuer’s tax returns (but need not include the tax returns themselves.
  • If the current offering, plus previous offerings under the Regulation, are more than $100,000 but less than $500,000, the financials must be reviewed by a CPA.
  • If the current offering, plus previous offerings under the Regulation, are over $500,000, the financials must be audited. If, however, the issuer has not previously sold securities in reliance under the Regulation, the financials must be reviewed by a CPA.

Keep in mind that there are no exceptions to these requirements, even for very early stage companies. So, if your company has just been formed, and you want to raise over $500,000, you’ll need to provide audited financials.

The amount the issuer can sell to an individual investor is limited. My next blog will discuss the specific investor limitations.

Advertising the offering is, not surprisingly, very limited. An issuer can publish a notice advertising the offering terms similar to “tombstone” ads. The notice must include the address of the funding portal or broker-dealer who is assisting with the offering.

In addition to the initial disclosure documentation, an issuer must file annual reports with the SEC and provide them to investors. The annual reports must contain much of the same information required under the initial disclosure document. Once the issuer becomes a reporting company under the Exchange Act, there is no further need to provide the annual reports required by the Regulation. The rules under which a crowdfunding issuer becomes subject to the reporting obligations under the Exchange Act have been relaxed if the issuer is current on its annual reporting obligations, uses a registered transfer agent, and has less than $25 million in total assets.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

LLC Owners – Don’t forget to pay your LLC’s 2016 gross receipts fee by June 15!

By: Tamara B. Pow

Even though we are not even halfway through the year, it is already time to pay your LLC gross receipts fee. LLCs classified as partnerships or disregarded entities are required to estimate their total annual income, and pay an estimated LLC fee by the 15 th day of the 6 th month of their taxable year (June 15 for calendar year LLCs). If you underestimate the fee, there is an underpayment penalty equal to 10% of the difference between the amount you paid and the amount actually due. There is no reasonable cause exception, but there is an exception for timely paying an amount equal to or greater than the LLC’s fee for the previous year. The LLC should use FTB Form 3536, Estimated Fee to remit the estimated fee payment.

The LLC Annual Fee is in addition to the $800 per year franchise tax. The amount of the Annual Fee is based on gross revenue of the LLC:

Gross Receipts

Annual Fee

Less than $250,000

$0

More than $250,000 but less than $500,000

$900

More than $500,000 but less than $1,000,000

$2,500

More than $1,000,000 but less than $5,000,000

$6,000

More than $5,000,000

$11,790

Make Sure You Understand Pass Through Entities Before Forming a Limited Liability Company

By: Tamara Pow

One of the major considerations in determining the right entity for a business is how it is taxed. There are major differences in the taxation of owners in corporations that pay their own corporate income taxes and owners in pass through entities. Like general partnerships, limited partnerships, limited liability partnerships and S corporations, the LLC is a pass through entity for tax purposes. This means that it is not a separate taxpaying entity for income tax purposes. Instead, the members of the LLC, like partners in a partnership, report their share of LLC income, gain, loss, deductions and credits on their personal tax returns by using the numbers from a Form K-1 received from the LLC, and attaching the Form K-1 to their individual tax returns. The LLC is treated as a partnership for tax purposes and files a Federal Partnership Tax Return on Form 565.

The Form 565 filed by an LLC is an information return which shows the taxable income of the LLC and each Member’s share of that income. Certain deductions are disallowed on the LLC information return, usually to avoid a double deduction (doubling up with deductions that can be taken on a Member’s personal return). Also, certain income and deduction items are separately stated, rather than being lumped into overall income or expenses, so that the character of that particular item can be passed through and treated correctly on the Member’s tax return. Some examples of separately stated items include short and long-term capital gains and losses, charitable contributions, medical and dental expenses and nonbusiness expenses. This means that if an LLC owned by two Members donates $1,000 to charity, and the Members share profits and losses equally, each Member’s Form K-1 will show a $500 charitable donation attributable to that Member. This $500 donation will flow through to be included with any other personal charitable donations that Member made in that taxable year, and will be jointly subject to any limitation on deduction of that person’s total donations.

Because the LLC is a pass through entity, it usually must have the same tax year as its Members. If the LLC Members are individuals, this typically means a calendar year, but not always. The general rule is that an LLC must have the same taxable year as members who own, in total, more than 50% of LLC profits and capital. If there are no majority owner(s) with the same taxable year, then the LLC must use the same taxable year as all of its principal Members (a principal member owns five percent or more of profits and capital of the LLC). If the principal Members have different taxable years, or if there are no principal Members, then the LLC must default to using the calendar year as its taxable year. There is a limited exception to this rule. If an LLC can establish a sufficient business purpose for adopting a different taxable year, or if a different taxable year will not cause more than 3 months’ deferral of recognition of income for its Members, the IRS will allow it.

In addition to the taxable year, the LLC can make certain tax elections which will affect the tax treatment of LLC items, such as methods of depreciation for LLC property, the choice of inventory method, the choice to adjust the basis of LLC assets on the transfer of an LLC interest or on certain distributions from the LLC, and others. There are also some elections that may be made by the individual Members, such as credits for foreign taxes paid.

Although the LLC itself may not pay any income tax, the information reporting of the LLC tax items directly affects the taxation of the Members, and should be planned for well in advance of the tax reporting deadline.

If you are forming a limited liability company, or investing in any partnership or other pass-through entity, be sure to talk to your tax advisor and ask all the questions you can think of until you understand what the tax implications will be for your personal tax return so that you don’t get a surprise next April.

Tamara B. Pow is a founding partner of Strategy Law, LLP (a pass-through entity) in downtown San Jose. She has been forming LLCs and partnerships and helping business founders with the choice of entity decision for 20 years. She has also invested in numerous partnerships and LLCs personally and prefers not to get surprised by what is on any Form K-1 she receives.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.