An LLC is one form of business entity that may be right for working RVers who want to run a business from their RV. In this article Martin Shenkman, CPA, JD, lists the steps and tells why.
Retail Business and Your Recreational Vehicle
by Martin Shenkman and Judy Justice
A couple started out with a travel trailer that they enjoyed for pleasure. They decided to do a business selling retail items at street fairs and events in their region. After a year or two, they decided they wanted to go to the southwest for the winter. They upgraded to a motor home and took their business to swap meets in the southwest.
This couple chose to be a Limited Liability Company ("LLC") for maintaining the business. Even though they incurred some cost hiring an attorney to set up their LLC, they felt it was worthwhile for a couple of reasons. Selling at retail means dealing with the public. At some of the rallies they attended, customers would come into their motor home to look at and purchase merchandise. Although their merchandise was not dangerous, some products had small parts a child could swallow. They didn't want to put the money they had set aside for their retirement at risk if a lawsuit ever occurred, so they formed a Limited Liability Company.
Here are some of the steps they took:
• They filed a certificate in the Secretary of State's office in the state where they live and their RV is registered. (What might seem like a simple and "standard" online form can have significant tax, legal, and other ramifications. If you can afford to hire an attorney, that is likely to be the best approach.)
• They obtained a tax identification number online from the IRS. (Some states will require a registration process/form and may issue their own identification number.)
• They opened a bank account in the name of the Limited Liability Company, using the tax ID they obtained for the entity. (The state the LLC and bank accounts are in have an impact on state income taxation of the venture and personally.)
• They committed to never mixing (commingling) business money and personal money. (The only time to use money earned in the business personally is after a distribution is made from the LLC.)
• They had their attorney prepare an "operating agreement" for the Limited Liability Company that provides the rules for how it will run. (It is an important part of demonstrating that the LLC is legally real and should be respected as an entity.)
Since the couple owned the business they thought they'd have to file a partnership tax return, Form 1065, to report income to the IRS. Two or more owners of an LLC that is not a corporation are generally taxed as a partnership for income tax purposes. There are exceptions.
An LLC can elect to be taxed as a special type of pass through corporation called an S corporation. Some CPAs believe that gives you a better payroll tax result.
Another exception permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for federal income tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply. Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for federal tax purposes. All items of income, gain, loss, deduction, and credit are divided between the spouses in accordance with their respective interests in the venture. This is a great savings in accounting fees each year.
While every business is different, the above case study might be useful to provide you with some ideas as to how you'll want to precede.
Martin M. Shenkman, CPA, Esq. sponsors a free legal website LawEasy.com.
Martin is an RVer with a special cause. He is an avid fundraiser for the National Multiple Sclerosis Society and The Michael J. Fox Foundation For Parkinson's Research. Besides RV business tax and legal information, he will share some of his RVing and fundraising experiences with us.
Judy Justice has an MBA in Management and an MBA in Financial Management. She teaches online and operates a business with her husband while RV'ing.
Caution: This article and other columns can never substitute for professional legal, tax, and accounting guidance. These columns can provide only broad general advice, which may not apply to your situation. The rules differ substantially from state to state. Tax, business, and other laws change rapidly over time so there can be no assurance that the information in this column is current. The best approach is to review the ideas in this article with your own CPA and attorney. The application of general tax and legal principles to some of the unique facts presented by RV working is particularly complex and there is little specific law providing guidance to rely upon.