Want to Trim Some Fat? Get Your Arms Around Your Entities
In every business, large and small, entrepreneurs and managers are focused on trimming costs. We recently posted an article on how LLC owners can consider some restructuring to reduce their California taxes. Here are some other great ways to reduce costs:
1. Close all unnecessary entities. Years ago, I formed a LLC for a small investment. When the transaction ended, I kept the LLC alive only because I liked the name. This cost me $800/ year in franchise tax and some administrative expense (e.g., the cost of preparing a tax return, maintaining a checking account, etc.). 2009 is the year to properly dissolve business entities that are no longer serving a business purpose.
2. Surrender lingering qualifications. Suppose you formed a Delaware company and qualified it to do business in Arizona when you purchased a small property there. Later, you did a 1031 exchange and acquired a property in Texas. Are you still paying taxes and filing a return in Arizona? If so, why? When a company is formed in one state and doing business in another state, the entity must “qualify” to do business in the state where it is conducting business operations. Once qualified in a particular state, the entity must pay franchise taxes and file a tax return there. It’s a simple process to surrender lingering qualifications, and doing so can avoid wasted franchise taxes and administrative expenses.
3. Stay on top of state filings to avoid junk fees. Most states require every business entity to file an annual report of one form or another. The fees are nominal, but the late fees for tardy filings can really add up. The normal $125 state fee in Nevada can grow to $200, and the puny $20 fee in California can become $250 before you know it. Develop a system to track state filing deadlines and file online to avoid junk fees.
4. Don’t overpay your resident agent. State law requires each entity to have a resident agent. Frequently, we see annual fees that are nearly $300/year. Forgive the plug for my business, but eResidentAgent (www.eresidentagent.com) will act as resident agent for $125/ year. If your company is doing business in several jurisdictions, or if you have lots of entities, switching agents can save hundreds or thousands of dollars annually.
5. Why be a LLC? In California, only LLCs pay the California “gross receipts” fee. If your business does not need to be a LLC, convert to a S-Corporation immediately. Failing to do so is like handing out hundred dollar bills on Wilshire Boulevard. For more on this topic, take a look at our article, Looking to cut costs? Start with your LLC.
6. Convert LLCs to LPs. Real estate investors who own lots of LLCs can often times convert to LPs and save an enormous amount of gross receipts fees. For more on this topic, take a look at our article, Looking to cut costs? Start with your LLC.