The privilege license tax is a tax levied on the privilege of conducting a particular trade or business. If you are a professional that is licensed by a board, you most likely should be paying state privilege license tax every year (for example, accounts, attorneys, general contractors, realtors). There are some exceptions to this requirement, like professionals working for the government or non-practicing physicians, to name a couple.
However, there are some surprising professions on this list; most notably, photographers.
A list of applicable professions can be found here:
And the license application can be found here:
The license is issued to the individual and not the business. While the individual can go ahead and form his/her business, the license should be applied for before beginning business. It is unlawful to engage in business without obtaining a required privilege license. The penalty for failure to obtain a license is the greater of five dollars ($5) or five percent (5%) of the amount prescribed for the license per month or fraction thereof from the time the amount is due until the amount is paid, up to a maximum not to exceed twenty-five percent (25%).
The privilege license tax is annual and is due by July 1 of each year. The penalty for failure to pay any tax when due is ten percent (10%) of the tax due.
Because the license is issued to the individual and not the business, if an individual is engaged in more than one business, he/she will have to obtain a privilege license for each business. If you are a licensed psychologist who has a photography business on the side, you must obtain two privilege licenses and pay two taxes, for example. The license must be displayed conspicuously at the location of the licensed business, trade, or profession.
If you have questions about the privilege tax, please give us a call!
Have you heard of a B-Corp yet? B-Corp is short for "Benefit Corporation." A Benefit Corporation is a type of for-profit business structure. For-profit business structures, by definition, have profit as a legally defined goal. In addition to profit as a legally defined goal, Benefit Corporations include an additional goal: a positive impact on society, workers, the community and the environment. In other words, in addition to considering profit for their shareholders in their decision-making process, Benefit Corporations have an obligation to consider the impact on society and the environment.
States within the United States first started passing Benefit Corporation legislation in 2010. Benefit Corporations are currently a valid form of business structure in 33 states plus the District of Columbia and many other countries. Although North Carolina is not one of the 33 states in the United States that has designated Benefit Corporations as a legal form of business, the state is currently considering legislation to do so.
Even though Benefit Corporation structure doesn’t officially yet exist in North Carolina, businesses in North Carolina can still acquire their “B Corporation certification.” A B Corporation certification, also known as B-Lab certification, is a private certification issued to for-profit corporations by B Lab, a global non-profit organization. In order to obtain B-Lab certification a business must meet certain criteria for social and environmental performance. Although B-Lab certification has no legislative framework (and therefore has no legal status), Certified B-Lab companies are eligible for discounts from outside entities and fellow members. In addition, B-Lab certification is not necessary to obtain Benefit Corporation status.
North Carolina currently has 37 companies that have obtained their B Corporation certification by B Lab. If you are interested in obtaining your B Corporation certification or forming a Benefit Corporation, contact Jesson & Rains.
Contribution by Cyrena Ivie, of Jesson & Rains, LLP
We have had clients contact us who are interested in forming several LLCs for liability protection but then have heard that it is a good idea to form a “holding company” to then own these LLCs under one umbrella.
Traditionally, holding companies are corporations that own stock in other corporations, and all they do is collect dividends from the stock. Berkshire Hathaway is the most famous holding company. It owns stock in many notable companies. It’s beneficial for the holding company to own a majority amount of stock, too, for control and tax purposes. Holding companies are a way for investors to buy shares of companies and make money by receiving dividends for doing nothing but investing. The owners of Berkshire Hathaway (its shareholders) don’t run any of the companies it owns. The board and officers of Berkshire Hathaway (including Warren Buffet) don’t run any of the companies Berkshire Hathaway owns. Of course, if Berkshire Hathaway owns a controlling amount of stock, it could vote to replace the board if the subsidiary wasn’t doing well.
Nowadays, people are forming “holding companies” for other purposes. Modern holding companies are really used as a tool for liability protection. If you form one LLC to own or “hold” the real estate, you can form a second LLC to operate / manage the properties. That way, if one LLC gets sued, the property of the other is not up for grabs. For example, if someone sues the property management company and it has to file bankruptcy, the building is safe because it is owned by the other LLC and its owners (also the owners of the operating LLC) can form another operating LLC immediately.
We think it is a great idea to form multiple LLCs. The more segmented and specific you can get it, the more liability protection there is. However, with each new LLC, there are additional costs: formation fees, annual report fees, and accounting fees.
Some people think that there is a benefit to having a parent LLC own multiple LLCs. So, in our example above, Real Estate Enterprises LLC would own the property holding LLC and the operating LLC. Again, creating a parent company for the purposes of simply “holding” the separate LLCs is an added expense without much of a benefit. There’s no increased liability protection forming a parent company. Each LLC has to file annual reports and tax returns each year, so consolidating isn’t making that easier. There is possibly an extra layer of management, too (management of the subsidiary and management of the parent) that may be unnecessary.
For investment purposes, though, there may be some benefit. The subsidiary LLCs are assets on the parent company’s books. There are also some estate planning benefits. Instead of having the deceased’s ownership interest pass to the heirs for 12 different companies, the parent LLC’s interest could pass to the heirs and they would automatically own all the subsidiary LLCs.
With any business formation, it is important to contact a business planning attorney and a reputable CPA.
The number one reason why we recommend individuals form businesses instead of operating as a sole proprietor or partner is for liability protection. Generally, a member of an LLC or an owner of a corporation will not be personally responsible for the debts and liabilities of the business.
1) If the member or owner signs a personal guarantee. It is very common for banks and landlords to require new business owners to sign a guarantee which “guarantees” the bank or landlord that if the business is unable to pay back the loan or pay the rent, the member/owner will pay personally.
2) If the member or owner is personally negligent. A member/owner can be held personally liable for his own careless actions if he injures someone while operating the business. Professionals can be held personally liable for their own malpractice. This is why we also recommend getting commercial liability insurance. A member/owner can also be held personally liable for conduct occurring outside the scope of employment.
3) If a court “pierces the corporate veil,” meaning the LLC or corporation was merely a shell for the member/owner to carry out his wrongdoing and served no legitimate business purpose. Three elements must be satisfied before a court will hold the member/owner personally liable:
In North Carolina, generally, the answer to this question depends on (1) what type of business you own; (2) whether you have bylaws or an operating agreement; (3) whether you have a will; and (4) if you have an insolvent estate.
No matter what type of business, your interest in the business is an asset. Unless there’s a contract stating otherwise, it is an inheritable asset, meaning if you have a will, you can name who the interest passes down to, or if you do not have a will, the interest will pass to your heirs (spouse, children, etc.). If you want to pass your business interest to your son, who will run the family business, instead of it passing naturally to your spouse, you need to have a will drafted.
When the individual and the business entity are interwoven, like a sole proprietorship or a partnership, it is important to note that business debts are oftentimes personal and can cause your estate to be insolvent (leaving nothing for your family). This is an important reason to form a business entity separate from the individual. If your business is not healthy, it may cease to operate at your death and wipe out your estate.
If you have a contract with other members of the business, you can state what happens to your interest when you pass. This is one of the reasons why we urge people who are going into business with non-relatives to enter into operating agreements – do you really want to be working with your business owner’s spouse after the pass away? More importantly, what happens if the spouse has no interest in running the business? What if she wants to sell or have you buy her out? What if you cannot afford to do so? In addition to recommending our clients enter into operating agreements, we recommend that they incorporate buy/sell language into these agreements. Financial professionals can find inexpensive ways to fund these agreements so that a partner can afford to buy another out.
If you own stock in a corporation, that stock will be passed to your beneficiary or heirs just like any other property. While this is not a big deal if you own stock in AT&T, for example, it is a big deal if you own 90% of the shares of a small, family owned business. Again, maybe your business partner does not want to own the corporation with your spouse.
If it is your wishes to continue your business when you pass, and your family is onboard, it may be a good idea to put your business interest in the name of a revocable trust. This way, your business interest stays out of your estate when you pass away and the trustee can manage your business interests better than the executor can. Many attorneys will recommend to executors to liquidate business assets because there is too much potential for liability on the executor’s part if he/she attempts to continue to operate the business.
We recommend that all individuals get an estate plan in place. However, as you can see, there is more planning to be considered when that individual is a business owner. Feel free to contact Jesson & Rains if you have questions about your business or estate plan.
Soon-to-be-business owners often ask us if there is any reason to form their businesses in Delaware instead of North Carolina because they’ve heard or read that corporations frequently form their businesses there. Lately, there’s been a lot of interest in incorporating in Nevada and Wyoming due to aggressive advertising.
For most small business owners, incorporating in a state other than your home state will have very little benefit to you and the business and will likely cost you more money. Not only will you have to file annual forms with both states every year, which costs money, you’ll have to get a Certificate of Authority to do business in North Carolina after your formation paperwork has been approved in the other state, which also costs money. Depending on the state, the formation paperwork could cost considerably more than North Carolina.
Some people recommend incorporating in Nevada and Wyoming because those states do not have a corporate tax or a personal income tax. This fact may be insignificant if your business is an LLC, not a corporation, because an LLC oftentimes does not pay corporate taxes. If your business is paying corporate taxes, it may have to pay them anyway because the corporation is based out of and does business in North Carolina. Furthermore, whether you pay personal income tax depends on the state where you live. North Carolina has a personal income tax. Forming in a tax-free state will not save you money on taxes if you live and work in another state.
The reason why so many large corporations form or convert their business to a Delaware corporation is because Delaware has a sophisticated corporate law and a Court of Chancery that only hears corporate cases. Based on these thoroughly-developed statutes and judicial opinions, corporate directors and officers are able to better understand their fiduciary duties and shareholders know what to expect. Delaware also has a reputation of being pro-management.
Nevada has recently amended its corporation law, which now resembles Delaware’s. However, at one point, Nevada touted that it is even more pro-management, limiting director’s and officer’s liability only to violations involving intentional misconduct or fraud. Shareholders may want to be cautious of Nevada corporations.
For most small businesses, these facts are insignificant because they are single member or family-run LLCs. There are no boards of directors or shareholders. However, if a small business expects to grow rapidly and has an eye towards getting venture capitalist funding or an IPO, it may want to consider forming in Delaware. Investors may require that those businesses convert into a Delaware corporation. If it is highly likely that will happen, the business may save some money by forming that way initially. This is a rare case, and converting a business to a Delaware corporation is not very expensive.
So in conclusion, like a lot of things we write about, do not always believe what you hear! There are little to no advantages to forming your business in other states, and it is likely that doing so without guidance from an attorney can result in additional costs to you. Please give us a call if you would like more information.
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