Setting up a LLC for two partners in different states, what should we look into?
"TL;DR: Get a tax adviser (EA/CPA licensed in your State) for tax issues, and a lawyer for the Operating Agreement, labor law and contract related issues. Some things are not suitable for DIY unless you know exactly what you're doing. We both do freelance work currently just through our personal names.   What kind of taxes are we looking into paying into the business   (besides setup of everything) compared to being a self proprietor?   (I'm seeing that the general answer is no, as long as income is <200k,   but not certain). Unless you decide to have your LLC taxed as a corporation, there's no change in taxes. LLC, by default, is a pass-through entity and all income will flow to your respective tax returns. From tax perspective, the LLC will be treated as a partnership. It will file form 1065 to report its income, and allocate the income to the members/partners on schedules K-1 which will be given to you. You'll use the numbers on the K-1 to transfer income allocated to you to your tax returns and pay taxes on that. Being out of state, will she incur more taxes from the money being now   filtered through the business? Your employee couldn't care less about your tax problems. She will continue receiving the same salary whether you are a sole proprietor or a LLC, or Corporatoin. What kind of forms are we looking into needing/providing when   switching to a LLC from freelance work? Normally we just get 1099's,   what would that be now? Your contract counterparts couldn't care less about your tax problems. Unless you are a corporation, people who pay you more than $600 a year must file a 1099. Since you'll be a partnership, you'll need to provide the partnership EIN instead of your own SSN, but that's the only difference. Are LLC's required to pay taxes 4 times per year? We would definitely   get an accountant for things, but being as this is side work, there   will be times where we choose to not take on clients, which could   cause multiple months of no income. Obviously we would save for when   we need to pay taxes, but is there a magic number that says ""you must   now pay four times per year"". Unless you choose to tax your LLC as a corporation, LLC will pay no taxes. You will need to make sure you have enough withholding to cover for the additional income, or pay the quarterly estimates. The magic number is $1000. If your withholding+estimates is $1000 less than what your tax liability is, you'll be penalized, unless the total withholding+estimates is more than 100% of your prior year tax liability (or 110%, depending on the amounts). The LLC would be 50% 50%, but that work would not always be that. We   will be taking on smaller project through the company, so there will   be times where one of us could potentially be making more money. Are   we setting ourselves up for disaster if one is payed more than the   other while still having equal ownership? Partnerships can be very flexible, and equity split doesn't have to be the same as income, loss or assets split. But, you'll need to have a lawyer draft your operational agreement which will define all these splits and who gets how much in what case. Make sure to cover as much as possible in that agreement in order to avoid problems later."
"A tax return is a document you sign and file with the government to self-report your tax obligations. A tax refund is the payment you receive from the government if your payments into the tax system exceeded your obligations.  As others have mentioned, if an extra $2K in income generated $5K in taxes, chances are your return was prepared incorrectly. The selection of an appropriate entity type for your business depends a lot on what you expect to see over the next several years in terms of income and expenses, and the extent to which you want or need to pay for fringe benefits or make pretax retirement contributions from your business income. There are four basic flavors of entity which are available to you: Sole proprietorship. This is the simplest option in terms of tax reporting and paperwork required for ongoing operations. Your net (gross minus expenses) income is added to your wage income and you'll pay tax on the total. If your wage income is less than approximately $100K, you'll also owe self-employment tax of approximately 15% in addition to income tax on your business income. If your business runs at a loss, you can deduct the loss from your other income in calculating your taxable income, though you won't be able to run at a loss indefinitely. You are liable for all of the debts and obligations of the business to the extent of all of your personal assets. Partnership. You will need at least two participants (humans or entities) to form a partnership. Individual items of income and expense are identified on a partnership tax return, and each partner's proportionate share is then reported on the individual partners' tax returns. General partners (who actively participate in the business) also must pay self-employment tax on their earnings below approximately $100K. Each general partner is responsible for all of the debts and obligations of the business to the extent of their personal assets. A general partnership can be created informally or with an oral agreement although that's not a good idea. Corporation. Business entities can be taxed as ""S"" or ""C"" corporations. Either way, the corporation is created by filing articles of incorporation with a state government (doesn't have to be the state where you live) and corporations are typically required to file yearly entity statements with the state where they were formed as well as all states where they do business. Shareholders are only liable for the debts and obligations of the corporation to the extent of their investment in the corporation. An ""S"" corporation files an information-only return similar to a partnership which reports items of income and expense, but those items are actually taken into account on the individual tax returns of the shareholders. If an ""S"" corporation runs at a loss, the losses are deductible against the shareholders' other income.  A ""C"" corporation files a tax return more similar to an individual's. A C corporation calculates and pays its own tax at the corporate level. Payments from the C corporation to individuals are typically taxable as wages (from a tax point of view, it's the same as having a second job) or as dividends, depending on how and why the payments are made. (If they're in exchange for effort and work, they're probably wages - if they're payments of business profits to the business owners, they're probably dividends.) If a C corporation runs at a loss, the loss is not deductible against the shareholders' other income.  Fringe benefits such as health insurance for business owners are not deductible as business expenses on the business returns for S corps, partnerships, or sole proprietorships. C corporations can deduct expenses for providing fringe benefits.  LLCs don't have a predefined tax treatment - the members or managers of the LLC choose, when the LLC is formed, if they would like to be taxed as a partnership, an S corporation, or as a C corporation. If an LLC is owned by a single person, it can be considered a ""disregarded entity"" and treated for tax purposes as a sole proprietorship. This option is not available if the LLC has multiple owners.  The asset protection provided by the use of an entity depends quite a bit on the source of the claim. If a creditor/plaintiff has a claim based on a contract signed on behalf of the entity, then they likely will not be able to ""pierce the veil"" and collect the entity's debts from the individual owners. On the other hand, if a creditor/plaintiff has a claim based on negligence or another tort-like action (such as sexual harassment), then it's very likely that the individual(s) involved will also be sued as individuals, which takes away a lot of the effectiveness of the purported asset protection. The entity-based asset protection is also often unavailable even for contract claims because sophisticated creditors (like banks and landlords) will often insist the the business owners sign a personal guarantee putting their own assets at risk in the event that the business fails to honor its obligations.  There's no particular type of entity which will allow you to entirely avoid tax. Most tax planning revolves around characterizing income and expense items in the most favorable ways possible, or around controlling the timing of the appearance of those items on the tax return." "Did it show just your address, or was your name on it as well?   You didn't share how long you've lived at the address either, so it makes me wonder whether a former tenant is the one who filed that paperwork.  It's also possible that someone used your address when making a filing.  Whether that was deliberate or accidental is hard to discern, as is their intent if it was intentional. It could be accidental -- someone picked ""CA"" for California when they meant to pick ""CO"" for Colorado or ""CT"" for Connecticut...These things do happen.  It can't make you feel any better about the situation though. You should be able to go online to the California Secretary of State's website (here) and look up everything filed by the LLC with the state.  That will show who the founders were and everything else that is a matter of public record on the LLC.  At the very least, you can obtain the registered agent's name and address for the LLC, which you can then use to contact them and ask why your address is listed as the LLC's business address. Once you have that info, you can then contact the Secretary of State and tell them it isn't you so they can do whatever is necessary to correct this. This doesn't sound like a difficult matter to clear up, but it's important to do your homework first and gather as much information as you can before you call the state.  Answering ""I don't know"" won't get you very far with them compared to having the best answers you can about where the mistake started. I hope this helps. Good luck!" You need to first visit the website of whatever state you're looking to rent the property in and you're going to want to form the LLC in that particular state. Find the Department of Licensing link and inquire about forming a standard LLC to register as the owner of the property and you should easily see how much it costs. If the LLC has no income history, it would be difficult for the bank to allow this without requiring you to personally guarantee the loan. The obvious benefit of protecting yourself with the LLC is that you protect any other personal assets you have in your name. Your liability would stop at the loan.  The LLC would file its own taxes and be able to record the income against the losses (i.e. interest payments and other operating expenses.). This is can be beneficial depening on your current tax situation. I would definitely recommend the use of a tax accountant at that point.  You need to be sure you can really afford this property in the worst case scenario and think about market leasing assumption, property taxes, maintenance and management (especially if you've moved to another state.) No there is no way to have untaxed earnings.  Single Member LLC are taxed on your personal taxes.  Partnership LLC is taxed on your and your partners personal taxes.  An C-Corp LLC has its own tax bracket.  An S-Corp is taxed on your personal taxes (but does not get taxed as self-employment taxes).   At $500,000, YOU SHOULD BE AN S-CORP or C-CORP to save on self-employment taxes. Not a good idea.  When you form a partnership with someone that creates a legal connection between you two.  What if he racks up $50,000 on the company credit card?  Do you want to be responsible for that debt?   A better way to do this would be to either charge your clients $X for IT work and pay him half of $X which would get you the same 50% or simply have him agree to share 50% of any income he gets from people referred by you.   This can be done in a simple contract or agreement without force you both into a partnership. You should have a partnership agreement of some sort.  The reason partnership agreements exist is so nobody can change the game because of the outcome.   I'd say the most typical partnership agreement is that everyone gets an equal cut, meaning that everyone also makes an equal contribution.  If you have start up expenses of $10,000, you'd each contribute $5,000.  Separately, you can determine ownership share by contribution amounts, maybe one of you contributed $2,000 and the other $8,000; this would be an 80/20 split. The performance of the operation doesn't have anything to do with determining how to divide the pie, your partnership agreement determines that.  How much have you each contributed and what agreement did you make before you decided to be partners? If you have a poor performing business segment, then the partnership should get together and consider adjusting or stopping that line of business.  But you don't change how the pie is divided because of it; unless your partnership agreement says you do. If you have an actual legal entity (legal partnership) that is jointly owned by you and your partner, then the partnership receives the money, and the partnership then sends money to you and your partner. Each of you will pay tax on your share. It's possible that the partnership itself may have to pay taxes. If you are not following that procedure in terms of actual money flow - for example if the royalties are paid into your personal account instead of a partnership account - then you may have trouble convincing the tax authorities that this is the legal situation. If this is a small amount of money then you may be better off just paying the taxes. According to the Illinois Department of Revenue, you don't have to file any taxes that are specific to a LLC, only your personal taxes. LLC on Federal level is disregarded, instead you submit all your business income/expenses on Schedule C. On the state level - it seems to be the same (only individual tax return). Consult your state certified tax specialist. That is not the case in other states, for example in California LLC has to file its own tax return and pay its own taxes, in additional to the individual taxes.