Since LLC members (owners) are not employees, contributions to the Social Security and Medicare systems are not withheld from their paychecks. Instead, most LLC owners are required to pay “self-employment taxes” directly to the IRS.
The current rule is that any owner who works in or helps manage a business must pay self-employment taxes on his/her share. However, owners who are not active in the LLC — that is, those who have merely invested money but don’t provide services or make management decisions for the LLC — may be exempt from paying self-employment taxes on their share of profits.
Each owner who is subject to the self-employment tax, reports the amount due on Schedule SE (Form 1040), which must be submitted annually with their tax return. LLC owners (and sole proprietors and partners) pay twice as much self-employment tax as regular employees because regular employees’ contributions to the self-employment tax are matched by their employers. However, LLC owners also get to deduct half of the total amount from their taxable income, line 27 of Form 1040.
Generally, LLC members (owners) do not have any personal liability for the obligations of the entity. There are instances where members (owners) may be held personally liable by the court for the actions of the LLC. This is known as “piercing the corporate veil.”
As a home-based business, family child care service providers may be particularly challenged to demonstrate that the business is separate and apart from the owner (member.) Consequently, they are more likely to have their corporate veil pierced.
The most effective way a family childcare service provider can protect him.herself is by obtaining proper insurance coverage. See here for further information.
Establishing an LLC:
- Complete the Articles of Organization form (instructions are available on NY DOS LLC Guide web page).
- Sign and file the Articles of Organization establishing a limited liability company LLC (any person or business entity may be an organizer).
- Submit the completed Articles of Organization along with a filing fee of $200 to the New York Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231. The filing can be done via mail, fax, or online.
- Ensure that the name of the limited liability company is distinguishable from the names of other limited liability companies, corporations and limited partnerships already on file. See choosing an LLC name and search the Corporation & Business Entity Database.
- Limited Liability Company Law requires a copy of the Articles of Organization or a notice related to the formation of most limited liability companies to be published in two newspapers for six consecutive weeks. A Certificate of Publication, with the affidavits of publication of the newspapers annexed thereto, must be submitted to the Department of State, with a $50 filing fee. More information available on NY DOS LLC Guide web page.
- The LLC will need a taxpayer identification number, obtainable from the Internal Revenue Service (http://www.irs.gov/).
- The LLC may have to pay or collect sales taxes, withholding taxes and other taxes depending on the nature of its business. (NYS Tax Bulletin ST-175, 2010).
The Department of State staff cannot provide legal advice; however, they are available to answer questions about filing LLC documents at (518) 473-2492 or email with any questions you may have.
Resources and Links:
While a childcare service provider is not required to have an operating agreement, it is recommended to establish one, even when the provider is the sole owner the company.
The main reason for the operating agreement is to ensure the courts will respect the limited personal liability.
An LLC member (owner) may be held personally liable by the court for the actions of the company under a number of scenarios—known as “piercing the corporate veil.”
As a home-based business, family child care service providers may be particularly challenged to demonstrate that the business is separate and apart from the owner (member.) Consequently, they are more likely to have their corporate veil pierced.
The most effective way a family childcare service provider can protect him/herself is by obtaining proper insurance coverage. See here for further information.
Resources and Links: