When you own your own business, staying on top of tax matters is of the utmost importance. Ensuring that you are in complete compliance with the Internal Revenue Service (IRS) is paramount to the ongoing financial health of your enterprise. In simple terms, you do not want to have tax problems. Owing more money than you had budgeted for, or facing stressful audits can be a major detriment to your business’s daily operations. With this in mind, it is wise to stay educated on tax issues that relate to your business. One common question that is often asked is, “Does an LLP Get a 1099 Form?”
In forming an LLP, you construct a legal entity that is viewed as “pass-through” for IRS purposes. That means that the income of the business itself is not taxed, but rather the money made by the partners is instead subject to taxes. To put it another way, you can think of this as a business owner only being taxed once (their income) versus twice (the profits of the business and their income), which can occur in some corporate structures.
What is a Limited Liability Partnership?
Partnerships are relatively common in the business world. When two colleagues or peers share an entrepreneurial vision and decide to lean on each other’s expertise, they may go into business together. At a basic level, this is what is called a general partnership. Sometimes this is a legally-binding agreement with a profit-sharing arrangement in place. Other times, it can be a rather informal relationship, solidified with only a handshake or a verbal contract.
When a partnership decides to account for potential liability issues, they may wish to form a limited liability partnership. In an LLP, partners can be shielded from the liabilities that may arise from debts or lawsuits. Unlike a limited liability company (LLC), which can exempt all members from liability, an LLP allows for an individual partner to face liability in the event that it was caused by their own negligence.
Because of this accountability structure, LLPs are popular among service professionals. Doctors, dentists, architects, accountants, and attorneys often favor forming LLPs. This allows for the protection of a business and its partners in the event of one party’s malpractice. In some states, licensed professionals can only form LLPs and are actually not eligible to form an LLC.
Understanding the Purpose of a 1099
When tax season rolls around, business owners can find themselves inundated with paperwork. To avoid the potential pitfalls that can result from procrastination, it is prudent to stay on top of your taxes year-round. If you do business with freelancers, contractors, or companies, you may well need to issue a series of 1099 documents.
A 1099 is an information return that the IRS requires. In general, if you do business with an individual or company where you pay them more than $600, you are going to need to send them a Form 1099-MISC. You will also need to submit a copy to the IRS. If you have forgiven a portion of a loan that was issued to a debtor, you will want to create a Form 1099-C. There are also 1099s related to real estate transactions (Form 1099-S) and dividends (Form 1099-DIV).
Limited liability companies and partnerships can sometimes represent a gray area. LLCs and LLPs are issued at the state level, so if you are doing business with one, you may not know where they are positioned federally. In any event, it is wise to issue a 1099 to an LLP if you have done any significant amount of business with them. In short, it’s better to have your bases covered. Drawing up a 1099 is a small price to pay compared to the tax consequences you could face for underreporting.
Forming an LLP Online at the Corporation Center
If you are starting your own business, you are likely not a stranger to planning. In fact, chances are good that you have been plotting your entrepreneurial venture for many years ahead of time. That sort of organization and due diligence is important, and they are exemplary qualities for a business owner. If, in your preparations, you have landed on the idea of setting up a limited liability partnership, there are some actions that you can take.
The main thing to do will be to register your LLP with your local Secretary of State. While individual states have their own rules about this, generally speaking, you will have to complete some paperwork. At the Corporation Center, we offer easy-to-use online forms for business owners to form LLPs, LLCs, S-Corps, and more. If you take a moment to scan our navigation panel, you will see that we offer web forms for all 50 states. If you would like to learn more, contact us today by email or phone.