Partnerships have been around forever. Corporations have been with us for 400 years. The American LLC was invented in Wyoming in 1977. Alaska joined the fray more recently; however, they seem to have selected this entity as their entity of choice because the state makes it available for self filing online. An Anchorage LLC lawyer helps point out some of the issues the State leaves out on their web site and why a visit with a lawyer can pay dividends later.
Four Possible Federal Tax Returns for an Alaska LLC.
In contrast to the other business entities available, here you get lots of choices when it comes to how you calculate your taxes. This gives you the flexibility to decide whether you want flow through treatment like a partnership or a Sub S corp. These two different tax schemes are not identical, even though most tax professional tend to ignore the differences.
- With a single member LLC you can choose to simply file your federal taxes on a Schedule C attached to your Personal 1040.
- If you have two or more investors you can choose to be treated as a partnership for federal taxes. For this you would file a 1065 – partnership tax return.
- If you want you can choose to be treated as a Sub-chapter S Corporation. For this permutation you would file an 1120S return. You would then show the flow through components on your personal 1040 by reporting the K-1 items there. This is a very popular choice. This arrangement combines the informal management of an LLC with the employment tax advantages of an S corporation.
- You could also choose to be treated as a regular corporation and file an 1120 tax return. You probably shouldn’t choose to wind up in this spot. However, one of the risks of an LLC filing as an S-Corp is that it will become defective and wind up converting to an C-Corporation.
Two Types of Management Structures for an Alaska LLC.
You can either be member managed or manager managed. You make this election on the Articles of Formation. It is one of the fundamental choices that must be made. The government website gives you no idea what this means or the significance in the choice.
- Member Managed. Any member can bind the entire enterprise on any business transaction. This makes it easy to conduct business for any of the members. This is great if the members are all trust worthy. This is bad when members start treating the entity as their own personal bank account or you don’t communicate often. Most people select Member managed. It works well when you only have members that are active in the business and the business is small.
- Manager managed. Only the named manager can bind the entire enterprise on business transactions. This is great if you are the named manager, the entity will generally never have to pay bills that you don’t know about. However, this makes delegating authority to subordinates difficult. Everything tends to have to go through you. This is the style of management to select when there will be passive members that you don’t want spending the business funds.
Most commonly overlooked document in do it yourself Alaska LLC.
The most commonly overlooked document is the operating agreement. In single member LLC’s this is not much of an issue because you pretty much are only conducting business with yourself. However, anytime you have two or more members, you should have an operating agreement. It will be the governing document that you will rely on when communication becomes difficult or you need to resolve problems. Once the problems arise parties tend to not want to create the rules for resolving the issues. The reason that the document is the most forgotten document is the state does not require the parties to have the document. Most people just get the articles filed and leave it at that.
- Buy-Sell Provisions. You can add provisions that let you set the ground rules to resolve when and how the business will be sold between the members. You can consider issues like disability, death and management differences.
- Capital Structure. You can use this provision to lay out how much each investor will put into the organization. You can also address the issue of capital calls, dilution and anti dilution provisions.
- Voting Rights. When you have multiple owners you may want to set ground rules on voting rights for the naming of the LLC manager.
- Authority of the manager. You may want rules that show the authority of the manager on transactions and what dollar amount or subject matter requires a vote of the members.
- Allocations of Net Profits and Net losses. Most people will divide the net profits and net losses based on the proportion of the ownership interests. However, you may want to use a different allocation.
- Proration: When you have some members that are owners for a shorter time than the other members you have an issue of proration. You can decide what formula you will use to divide those profits or losses.
- Distributions. When your entity is a flow through entity that has profits, the members pay the taxes on their own returns. Without a cash distribution adequate to pay the taxes you can leave some members high and dry. If you are a minority member, you’ll be glad you have a mandatory tax liability distribution rule. You may also want
- Tax Allocations.
- Dissociation and Dissolution. When members dissociate or the entity is dissolved lots of issues arise. I should probably have another post focused solely on this set of issues.
- Transfer of Member’s Interests. Generally, in small businesses most people want to restrict the members rights to transfer their interests to third parties. However, sometimes things change and you’d like to get rid of a member that is either not pulling their weight or for other reasons.
- Winding up and Liquidation.
- Notices. Dealing with when, how and where the entity will notice its members is a good topic to cover in your operating agreement.
- Annual meetings. Knowing when and where the annual meeting is required is helpful. It provides the members certainty in when they should expect to learn about their investment.
You still have to comply with other regulations.
The possible regulations affecting your business are almost limitless. The borough, the state and federal governments all may have issued regulatory guidelines that affect your business. At a minimum you will have taxes to file and you’ll probably have employees. Accordingly, to get you started in the arena of regulations you’ll need the following:
- You need to get the IRS to issue you an Employer Identification Number (EIN). You’ll need this to file your taxes, open a bank account and file payroll reports.
- You need to apply to the Alaska Unemployment Division to file payroll reports.
Alaska Sales Tax Jurisdictions
We have quite a few municipalities and boroughs that have sales and uses taxes. Those locations that do not have sales and use taxes may still have special use taxes. If your business is involved in one of these jurisdictions you will need to get the proper permits and learn how to comply. The penalties for noncompliance can be severe. One of the quickest ways to seek which local governments are raising taxes is to look at the latest version of Alaska Taxable, the 2012 report is available here.