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!
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.
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