Thank You, Louisville
Cliff Ennico
www.creators.com
I was privileged to be the featured speaker at a recent #147;eBay for Business#148; forum in Louisville, Kentucky co-sponsored by eBay and
Entrepreneur
magazine. More than 200 souls, many of them faithful readers of this column each week in the Louisville
Courier-Journal
, braved a torrential downpour to hear their favorite Wall-Street-lawyer-turned-small-business-journalist speak on the legal and tax aspects of starting a business on eBay. And, like always at events like these, a lot of folks were looking for some heavily discounted advice on how to run their businesses.
Here are some of the more interesting questions that came up during the QA session after my talk:
#147;I ran an eBay business with another guy until the middle of last year, when I let him buy me out. He#146;s continuing with the old business, and I#146;m doing something similar as a sole proprietorship. Is there anything either of us has to do to let the world know we#146;re no longer a partnership?#148;
Actually, there are a few things. Your ex-partner has to file a Form1065 (partnership return) with the IRS, along with the corresponding Kentucky state tax form, by April 15 of this year, showing all income the two of you made last year until you dissolved the partnership. If this isn#146;t filed on time, you will be subject to a late filing penalty of $600 per partner ($1,200 total in your case). He should be sure to check the #147;last return filed#148; box on both returns so the tax authorities will know that this is the last partnership return you will file. Your ex-partner also needs to obtain new federal and state tax ID numbers for this business, as it is now a sole proprietorship and therefore considered a different type of entity for tax purposes.
In addition, both you and your ex-partner need to file Schedule C on your personal tax returns this year showing the income each of you made as sole proprietors after you dissolved your partnership.
#147;I formed a limited liability company (LLC) with my husband and obtained federal and state tax ID numbers for an eBay business last year, but never actually got started because my spouse was laid off from his full-time job and we both needed to work part-time to pick up the slack. I#146;m still thinking about doing this business someday, but do I have to file tax returns for a business that#146;s not doing anything?#148;
You absolutely must file federal and state tax returns for this business. Once you obtain federal and state tax ID numbers for a business, the tax authorities want to see a tax return each year with those numbers on it. If they don#146;t get returns matching those numbers, they assume you forgot to file them. That can trigger penalties for failing to file a tax return (see previous answer), and could lead to a tax audit that might not necessarily be limited to your business income.
Since you and your husband were co-members of the LLC, you should file Form 1065 (partnership return) by April 15 of this year. Since the business had no income, and possibly incurred a loss (if you#146;re not sure, talk to your accountant), this should be reflected on the Form 1065. You and your husband should also file Schedule C on your personal tax returns showing your percentage share (for example, 50/50 if that#146;s how you agreed to divvy up profits and losses from the LLC) of any loss from last year. Under current IRS rules, you can carry this loss forward and apply it against any income you may generate from the LLC business in future years.
#147;My father ran a successful retail business until he died last year, leaving the business, as well as his entire estate, to my mother. My Mom is very sick, and cannot run this business. She wants my wife and me to run the business, and split the profits 60% for us and 40% for her. How do we set this up legally?#148;
My answer has to be in two parts. First part: what you should do now. You probably should consider forming a limited liability company (LLC) for your Mom, so that if you do anything legally wrong in running the business it doesn#146;t affect your Mom#146;s personal assets or the other assets in your Dad#146;s estate. Your Mom would be the only member of the LLC, and would appoint you as #147;managers#148; to run the LLC business on her behalf. You would then have the sole power and authority to run the LLC business (in other words, your Mom can#146;t tell you what to do, at least legally), and your compensation would be 60% of the LLC profits. Your Mom, of course, would receive the other 40% as her ownership stake in the business.
Second part: what you need to do before your Mom dies. Under current tax law, if your Mom dies between now and 2010 and her estate is valued at more than a certain amount (which changes each year), any transfer to you or other family members will be subject to federal estate taxes, which are gradually being phased out between now and 2010. No one currently knows what will happen if your Mom dies after the year 2010; if the estate tax is not phased out permanently before then, it will revive, with tax rates going as high as 55% of the estate#146;s value.
If I were you, I wouldn#146;t play the #147;estate tax guessing game#148;. As soon as you form the LLC for your Dad#146;s old business, get your Mom to an attorney specializing in estate planning, and work out an orderly transfer of her LLC membership interests to you and your wife over the next few years. That way, if your Mom dies unexpectedly while the federal estate tax is still in effect, the tax will apply only to the percentage of the business she owns at the time of death. If it#146;s structured properly, your Mom won#146;t owe gift taxes on the portion of the business she transfers to you each year, and your Mom can still continue to receive 40% of the profits each year until she either dies or transfers all of her ownership to you and your wife.
One last thing: thanks to the anonymous individual who approached me in the hotel lobby after my talk and handed me a bag of #147;Kenny#146;s Cajun Gourmet Microwave Popcorn#148; (
www.kennyscajuncorn.com
). I truly admire your spunk and entrepreneurial spirit #150; to market a specialty food item successfully you#146;ve got to take advantage of EVERY selling opportunity you get -- and the popcorn is delicious. Now, if there are any entrepreneurs in Louisville distilling 100-proof Bourbon in their spare time . . .
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2005 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com
