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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12687
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My husband and I started a business and today we obtained an

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Hi, My husband and I started a business and today we obtained an EIN as an LLC Partnership. However, after a few hours we discovered the high franchise tax in California and no longer want to be an LLC. Should we cancel our current EIN and apply for a new one, or is there a way to change the business type to our already existing EIN? Also, if we do apply for a new EIN is a partnership the best option for a married couple that files a joint tax return? Would a sole proprietorship be more beneficial?Hope my questions make sense :/
JA: The Expert will know how to help. Is there anything else the Expert should be aware of?
Customer: The only other think I can think of is that we did successfully file for a DBA

HI, MY NAME’S LANE - I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986

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IRS created the “qualified joint venture” (QJV) election in 2007. This allows the husband and wife to be treated as two sole proprietors of the same business (instead of as partners). To do this, you must file jointly.

According to the IRS, your business qualifies if the following is true:

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  • You and your spouse are the only partners in the business;
  • Both partners participate in the business;
  • You file a joint return; AND
  • You both agree to the election to QJV.

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As a QJV, both partners (individually) complete a separate Schedule C on which they list their share of all revenues and expenses. If the QJV is 50/50, for example, and the business had revenue of $100,000 and expenses of $60,000. Each partner would report income of $50,000 and expenses of $30,000 on their Schedule C and pay the corresponding taxes.

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The partners each file a Schedule C along with the joint 1040 form.

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State Entity” Exclusion

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If your business is a state entity, most commonly an LLC, YOU, NORMALLY, MAY NOT FILE AS A QJV ...However ..., spouses doing business in a community-property state — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin — are exempt from this rule.

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SO ... You're fine here - Just file two schedule C's for your LLC, and by doing so, you are electing the Qualified Joint Venture.

Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

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Thanks,

Lane

Customer: replied 1 month ago.
Hi Lane,Thank you for the information regarding the QJV. However, I was most concerned about the EIN. I'm ashamed to admit it but we were overly excited to start our business and applied for our EIN as an LLC partnership before actually filling an articles of organization with the California Secretary of State. After becoming aware that California Charges a $800 franchise tax each year we decided that we did not want to be an LLC. So, my question is should we cancel the LLC EIN that we have and apply for a new EIN, or can we correct our EIN to be a general partnership or QJV?

The EIN can still be used for the LLC that's treated as a Qualified joint venture (by filing two Schedule C's) rather than defaulting to partnership taxation for multi-member LLCs (and then filing a 1065)

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Either way, as a partnership OR as an LLC you'd have the franchise tax.

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What I'll need to research, as it relates to California, is whether California treats the QJV as a sole proprietorship (husband and wife sole proprietorship, another name for the QJV when the LLC entity simply isn't used).

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THAT may be the way to escape the franchise tax. It would seem that you simply file the two schedule C's that profit that flows to ine 12 on the joint return becomes part of the AGI that is used as the starting point on the California Joint return.

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In that scenario you leave the EIN you applied for as an LLC lie dormant. And IF you want a separate EIN for the sole proprietorship (although it wouldn't be needed for your taxes, you'd simply use your social security numbers) to, say, open a business account or have employees, (the only reason a sole proprietorship or single member LLC EVER needs an EIN), you can do that for the sole proprietorship.

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Bear with me a for a bit.

Yes, California conforms by reference to Subchapter K of the Internal Revenue Code in R&TC section 17851 as of the specified date of January 1, 2005, with specified modifications. In general, the classification of an eligible business entity for California purposes is required to be the same as the eligible business entity’s classification for federal purposes.

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SO, if the objective is to escape the franchise tax, you elect QJV statue for your Husband and Wife sole proprietorship.

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The price for this is that you are not afforded the corporate law protection that comes from having the separate state law entity in the form on an LLC (whether taxed as an LLC partnership OR LLC QJV).

By the way, there is no requirement to USE an EIN. IRS does not retire EIN's, but if it's never used it simply is never used but simply could not be used by anyone else.

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Let me know if you have questions.

Lane and 3 other Tax Specialists are ready to help you
Customer: replied 1 month ago.
Thank you so much for your service and for all this helpful information. I have no further question. Excellent, 5 Stars!

Thanks so much,

Lane