Setting up a LLC for two partners in different states, what should we look into?

Question

My friend and I are looking into starting our own design agency. The LLC would be based out of Texas, but the other employee would be based out of North Carolina. We would both be full time employees of the company, so she would get paid that way. Collectively, we would most likely be making less than 100k total for the first few years (it's still meant as side work, not full time). We want to create and LLC for protection as well as looking like an actual business. Lots of people associate "free"-lance incorrectly and we would like to avoid those types of people. Some questions:

1. 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).

2. Being out of state, will she incur more taxes from the money being now filtered through the business?

3. 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?

4. 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".

5. 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?

Sorry for the newbie questions, it just seems like most Google results are a mixed bag of opinions.

I would also love any recommendation on great books to wrap my head around some of these concepts. I understand a great accountant will be needed, but I also prefer to have an understanding of what's happening. Thanks!

Answer 1

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.

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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.