My views on software, programming, Linux, the Internet, government, taxation, working, and life.

Wednesday, April 11, 2007

More Research on South Carolina, the Business Repellent

In my post here, I explained how South Carolina is confusing on its language regarding LLCs, is a business repellent in more ways than one, and also has made all Delaware Corps or LLCs pretty much illegal as a way to skirt paying SC taxes. I also explained how many states, not just South Carolina, are a business repellent especially for the online global economy regarding tax and business law, even after so many years of having the Internet around us as a regular part of our lives.

Today I went a bit further. I did a lot of meticulous research in SC's tax code and business laws. I called the SC Department of Revenue (DOR) and the SC Secretary of State (SOS) offices to try and get clear answers. Here's what I found.

  • Initially my call into the DOR got me with a woman who insisted the matter was not a DOR but an SOS matter and that I should call over there.
  • The SOS is very simplistic in nature and wanted to deflect all business law matters either to the SC Department of Justice, my legislators, or an attorney. As for tax law matters, they told me I can call the DOR.
  • The second time I called the DOR, of which I can assure you I was completely calm, this man on the phone wanted to see the actual link that seems to be causing so much trouble. He read it and then started to tell me that an LLC acts like a partnership at tax time and doesn't have to pay quarterly estimated income tax, but then scrolled down to the contradicting statements in the section on "Estimated Income Tax Payments" and in the next breath said if I make over a certain amount as an LLC I must pay quarterly estimated income tax! I said, "Oh really? What law is that? What is this dollar amount?" He then rudely said, "Well, you've gone past your one question on this call, so wait a sec and I'll get back to you." That "sec" was where I was put on 10 minute hold, my mobile phone drained of its power, and I lost the call. In essence he didn't know what he was talking about, was overpaid for his job and his complete lack of competence for his job, lied, was rude, and put me on infinite hold as a way of not dealing with me.
  • After hours of pouring over SC laws and amendments on the web, I finally found proof that an LLC is treated like a partnership at tax time, where members simply file self-employment on their annual return.
  • It took a link at a completely different agency, the SC Department of Labor, Licensing, and Regulation (SC LLR), to find out the real truth on how SC treats an LLC at tax time on page 12 of that PDF. The problem is, who should I believe more, the DOR website, the man on the phone at DOR, the SC law, or some friendly PDF at the SC LLR?
  • In essence, the best advice appears to get a good lawyer, follow the SC LLR's opinion on how an LLC is treated at tax time, and use actual state law to back yourself up. If the DOR ever come after you when you get too big, you can always use your research to back yourself up.
The SC LLR's key statement on LLCs, which was a major windfall for me to find today, says:

A single-member LLC is normally taxed as a sole proprietorship. An LLC that has two or more members, unless the owners choose to have the business taxed as a corporation, will be taxed as a partnership and will file an informational return that tells the IRS how much each member earned. The LLC does not pay taxes on its income, but, as with a partnership, each member reports his or her share of income (or loss) on Schedule E, Supplemental Income and Loss, which is filed with Form 1040. LLC’s file the same type of return (corporate or partnership) with South Carolina as they file with the IRS.
And that's about as clear as necessary.

So if one is wanting to create a startup company in South Carolina, an LLC is the best choice at first until you begin to hire employees, but it better be an SC-registered LLC and not a Delaware LLC or Delaware Corp (or a corp or LLC in another state) because those are now illegal after Geoffrey vs. South Carolina was recently ruled upon. You won't be able to take advantage of the Delaware deal of no sales, property, or income tax on a Delaware Corp, and no sales or property tax on a Delaware LLC. (It appears that Delaware LLCs do not pay state income taxes on the annual state return, but they do pay federal income taxes like a normal LLC.)

That said, your South Carolina LLC will be subject to quarterly sales taxes if you sell retail products, annual property taxes for business property, an annual self-employment tax (Schedule E) on your standard annual 1040, an annual franchise fee, and other minor fees. However, you will not be subjected to the dreaded startup killer, the corporate estimated income tax.

So take for instance this fact and realize that many small companies overseas are not plagued with these high tax problems or tax complexities. Realize that some states, also, are better tax havens than South Carolina is. So then it comes down to competing in the global marketplace on the Internet with businesses that can charge lower rates for goods or services. And South Carolina will lose, time and time again. A friendly southern accent and charm will get you nowhere with someone clicking to find the cheapest rate for goods and services on the web.

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