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Good evening. What would be the tax outcome for the following:

Good evening. What would...
Good evening. What would be the tax outcome for the following: LLC incorporated in NJ, with two partners, one residing in NJ, the other residing in NY. They will be selling products and services to NY but will not have physical presence. What is the tax implication to the LLC, and both respective partners?
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Answered in 17 minutes by:
9/30/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,160
Experience: Taxes, Immigration, Labor Relations
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Lev :

Hi and welcome to our site!
The LLC with two partners for income tax purposes is classified as a partnership unless members specifically select it to be treated as a corporation.
Thus - it is a separate business entity and files it own tax return.

Lev :

If no choice is made - the LLC would be treated as a partnership. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.


A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.


Some additional information about partnerships may be found in IRS Publication 541 - http://www.irs.gov/publications/p541/index.html


All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf


Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income (or loss) - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf



How income is divided between partners is based on the agreement between partners.


Customer:

What state would be most beneficial in registering, NY or NJ? Considering 90% of the customers are in NJ but there will be customers in NY, no physical presence in NY.

Lev :

The issue with state income taxes woudl be if the LLC conduct business operations in that state.
If the partner lives in NY - and conduct business activities out of his/her place - that means - the LLC conducts business operations in NY and the LLC must be registered in NY regardless if it originally created in NJ.

Customer:

The LLC partner will not be conducting business out of her residence. All business rendered and supplies will be out of NJ.

Customer:

The LLC partner will not be conducting business out of her NY residence.

Lev :

A foreign limited liability company ( foreign - means - registered out of NY) should apply for authority to do business in the State of New York by filing an Application for Authority pursuant to Section 802 of the Limited Liability Company Law. Similar rules are for most other states.
See here - http://www.dos.ny.gov/corps/llcfaq.asp
You wrote - .. they will be selling products and services to NY but will not have physical presence...
The issue is that the LLC is a separate business entity - and if none of business activities are conducted within the state of NY - registration is not required. But if the partner conducts business activities out of his/her place in NY - that means - the LLC is doing business in NY - and registration is required.
If however - all activities will be conducted out of NJ - the LLC is not required to be registered in NY - and will be treated as NJ partnership.

Lev :

If you are a partner in a partnership the amount of net income derived from the partnership must be reported on your New Jersey personal income tax return. While no tax is imposed directly on a partnership itself, every partnership having a New Jersey resident partner or having any income, gain, or loss from New Jersey sources must file a New Jersey Partnership Return, Form NJ-1065.
If you are a partner, you will receive a copy of Schedule NJK-1 that will list your share of the partnership income. You must report all income shown on this schedule in the “Distributive Share of Partnership Income” section of the NJ-BUS-1, Business Income Summary Schedule, whether or not the income was actually distributed.

Customer:

"If however - all activities will be conducted out of NJ - the LLC is not required to be registered in NY - and will be treated as NJ partnership." By activities, do you mean business process, office location etc. yes non in NY. There will be income/sales/clients from NY but no work will be performed in NY no physical presence. There will be no need to register correct?

Lev :

Generally - that is correct. However the question if a specific entity conducts business activity in NY might be not so simple.
The New York Department of State does not give opinions on what activities constitute doing business in New York State for qualification purposes. You may wish to review an Opinion of Counsel entitled "Doing Business" in New York: An Introduction to Qualification - http://www.dos.ny.gov/cnsl/do_bus.html
This publication provide references to statutes and court cases as that related to determination of "doing business" in NY.

Customer:

Got it. Thank you!

Lev
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