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STARTING AND OPERATING A BUSINESS IN NORTH CAROLINA Copyright © 2008, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION North Carolina has a fairly typical tax and legal structure under which businesses must operate. Some of the more attractive features of the state include a dynamic business and technology environment, with a number of top-flight universities, as exemplified by its Research Triangle complex of universities and private high technology firms. The North Carolina business environment is one of the friendliest of any state, including relatively low tax rates, no property tax on business inventories or intangible property, and a right-to-work law. In addition, in 2005 the North Carolina bulk sales law that formerly applied to purchases of existing businesses was repealed and the top income tax rate bracket on individuals was reduced from 8.25% in 2005 and 2006 to 8% in 2007 and to 7.75%, for tax years beginning in 2008 and thereafter. Like most states, North Carolina imposes income taxes on individuals and corporations, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in North Carolina in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. North Carolina represents a significant market, as it is now the 10th largest state, in terms of population. In recent years, the state's economy has recovered from the slowdown that resulted from the collapse of the stock market "Internet bubble" in 2000 and the events of 9-11-2001 and aftermath. However, in July, 2008, the state's unemployment rate has risen rapidly to 6.6%, up sharply from 4.7% a year earlier and now considerably higher than the national unemployment rate of 5.7% for July, 2008. To view the latest federal Bureau of Labor Statistics unemployment rate data for North Carolina or any other state, visit the BLS website. Like most southeastern states, North Carolina has a relatively low cost of living, compared to national averages, which makes it an attractive place for recruiting employees. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in North Carolina can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. North Carolina also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in North Carolina can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the North Carolina income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the North Carolina income tax and filing requirements for individuals. Doing business as a sole proprietor in North Carolina is much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the county or counties where you do business, as discussed in Section IV(g). (c) Partnerships. North Carolina's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions) and for a limited liability limited partnership (LLLP), which is a limited partnership that also elects limited liability partnership status. As discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which the business operates and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income tax in North Carolina, which follows the federal tax treatment of any partnership. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, partnerships with nonresident partners may be required to withhold state income tax on the nonresident partners' shares of the partnership's North Carolina-source income, although nonresident partners that are not individuals may instead enter into an agreement with the Department of Revenue to file North Carolina tax returns and pay North Carolina income taxes on such income. Most partnerships are required to file an annual tax information return with the state. For details on North Carolina partnership tax return filing requirements and possible required withholding of tax on behalf of nonresident partners, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in North Carolina can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b), as well as withholding state income tax from employees' wages, as discussed in Section V(a). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under North Carolina law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $50. A certified copy must also be filed with the Register of Deeds in the county where the limited partnership is registered to do business. Foreign limited partnerships must also register for a certificate of authority before being allowed to do business in North Carolina, and must pay a registration fee of $50. A limited partnership may also register as a limited liability partnership (LLP), providing liability protection to its general partners, but such a limited liability limited partnership (LLLP) will be subject to the somewhat higher filing fee ($125) that applies to an LLP, plus the LLP annual reporting requirements and annual fee of $200. Unlike other partnerships, the North Carolina Uniform Partnership Act states that limited partnerships are not required to comply with the North Carolina "assumed name" statute. However, since the state law in this regard is somewhat contradictory, see the discussion of assumed name registration requirements in Section IV(g). For information on limited partnership filing requirements, see the contact information for the offices of the North Carolina Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of North Carolina. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and North Carolina state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. A general partnership or the general partners of a limited partnership can achieve a significant degree of limited liability by simply registering the partnership with the state as an LLP or as a limited liability limited partnership. While election of LLP status will protect the general partners of a partnership from most types of liabilities, it will not protect a partner in a professional LLP from liability for his or her own such misconduct. To form an LLP in North Carolina, you must register your partnership with the secretary of state and pay a filing fee of $125. Foreign LLP's, those created under the laws of another state, must also register with the secretary of state and pay a fee of $125. Every LLP doing business in North Carolina, including both domestic and foreign LLP's, must file an annual report and pay an annual fee of $200. North Carolina law also provides for formation of limited liability limited partnerships (LLLP's), which are simply LLP's that have both general partners and limited partners, like a limited partnership, but in which the general partners have the same degree of limited liability as partners in a "regular" LLP. LLLP's are subject to the same filing fees and annual report fees and requirements as other LLP's, rather than the lower fees (and no annual report requirement) applicable to limited partnerships that have not elected to also become LLP's. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides North Carolina, is that some states, namely California and New York, only recognize certain types of professional partnerships as LLP's. If an LLP is not a professional partnership of a type that is allowed to operate as an LLP in such states, such other states may simply treat the LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in the state of North Carolina, you must file articles of incorporation with the North Carolina Secretary of State and pay a fee of $125. A foreign corporation (one formed under the laws of another state or a foreign country) must obtain a certificate of authority before it may legally conduct business in North Carolina, by filing an application for a certificate of authority and paying a filing fee of $250. Once a corporation is formed, or a foreign corporation has registered to do business in North Carolina, it will be required to file annual reports and a filing fee of $25 (for annual reports filed on or after September 1, 2007) with the North Carolina Department of Revenue each year. The annual report fee is reduced to $18 if filed electronically. Failure to file this report on a timely basis could result in suspension or revocation of the corporation's charter. For more information on filing articles of incorporation, applying for a certificate of authority to do business in North Carolina, or filing of annual reports, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition to paying federal income taxes on its income, a corporation that does business in North Carolina must also pay North Carolina corporate income tax and the corporate franchise tax on its capital or assets. See Section IV(c) for a discussion of state corporate income tax rates, the corporate franchise tax, and tax return filing requirements for these corporate taxes. For tax forms and more information on state corporate income and franchise taxes in North Carolina, see the contact information for the offices of the Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. North Carolina recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, an S corporation that has any nonresident shareholders must file a nonresident shareholders' agreement to pay North Carolina tax, or else must withhold North Carolina state income tax on the nonresident shareholder's proportionate share of the taxable income and remit the withheld tax to the state. Alternatively, an S corporation may elect to file a composite North Carolina income tax return and make composite tax payments on behalf of some or all of its nonresident shareholders. (f) Limited Liability Companies. North Carolina, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in North Carolina may also choose to operate in the form of an LLC. In most states, including North Carolina, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal income tax purposes. To form an LLC under the laws of North Carolina, one or more persons must file articles of organization with the secretary of state, which must be accompanied by a filing fee of $125. North Carolina state law allows for the formation of one-member LLC's, which qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in North Carolina, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $250. In addition to initial filing fees, an LLC formed in North Carolina must subsequently file annual reports with the secretary of state and pay an annual report filing fee of $200 with each such annual report. A foreign LLC is also required to file an annual report and pay the applicable filing fee of $200. North Carolina's tax laws follow the federal classification of an LLC, as either a partnership, sole proprietorship, C corporation, or S corporation, as discussed in Section IV(c). An LLC is exempt from the corporate franchise tax. However, beginning January 1, 2009, an LLC that has elected to be treated as a corporation for income tax purposes will also be subject to the North Carolina franchise tax (but is allowed a $175 credit -- the difference between the $200 annual report fee for an LLC and the $25 annual report fee for an LLC). For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as is discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Until recently, a buyer had to comply with the North Carolina bulk sale law when purchasing the assets of an existing business. Failure to comply would expose you to liability to any creditors of the seller who failed to get paid off when the sale of the business occurred. However, like more than forty other states have done in recent years, North Carolina has repealed its bulk sale law, on January 1, 2005, so this is one less bit of red tape you need to be concerned with, when acquiring the assets of an existing business. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In North Carolina, the seller should obtain and provide you a tax release for unemployment taxes, from the Employment Security Commission. You should also require the seller to obtain a transcript from the Department of Revenue, showing the status of the seller's payments and filings of state sales and use tax returns. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply on a timely basis to the North Carolina Employment Security Commission, requesting that you be treated as a successor employer, which is usually automatically approved. PLANNING POINT: EXAMPLE: IV. NORTH CAROLINA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
North Carolina generally has adopted a very friendly stance
towards business, and has been very successful in attracting
new businesses to the state. Tax rates are relatively moderate,
with a corporate tax rate that was been cut from 7.75% in 1996
to a rate of 6.9% by the year 2000 and since.
In addition, the top individual tax rate was reduced from 8.25%
in 2006 to 8% in 2007 and 7.75% in 2008.
However, a recent plan to decrease the sales and use tax rate
from 4.25% to 4% has been reversed and instead the sales and
use tax rate will increase to 4.5% on October 1, 2008, with
a further increase to 4.75% on October 1, 2009.
Employers that wish to maintain a nonunion work force may
find the state's right-to-work law attractive and, like most
states, North Carolina no longer subjects business inventories
or intangible personal property to property taxes. On the other
hand, the state still imposes a corporation franchise tax (in
addition to corporate income tax), which can be quite substantial
for larger companies.
For state tax forms and tax information, see the contact
information for the North Carolina Department of Revenue
in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some kind.
In most cases, this will be a local license, issued by your
city or county. Before you open your business, contact your
local city or county hall and find out if your particular
business needs one or more local licenses. Most kinds of
local business licenses are granted upon payment of a fee,
with no further requirements, except possibly for annual
or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning and
planning restrictions. If you own or rent any type of
facility, you will generally need fire department permits,
showing that you meet fire safety codes and any construction
or improvements to an existing structure will usually require
a building permit. If you intend to simply operate your
business from your home, you may be in violation of local
zoning requirements, but this is less likely to be a concern
if you don't have clients, customers, suppliers, or employees
coming to your house on business, on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as
physicians, dentists, lawyers, and accountants. To further
protect consumers, North Carolina has expanded the list of
occupations that must be licensed by the state to include
many other occupations. Most state licenses not only
require payment of fees, but are only issued for a given
profession or occupation upon showing that you have
completed certain educational or experience requirements,
or passed certain tests, or some combination of the
foregoing.
Unlike in some other states, there is no "generic" state
license required for all businesses in North Carolina. Some
businesses and occupations will require some kind of special
state license; others will not. Some of the types of
activities and occupations that require special state
licenses in North Carolina include the following:
For help with state licensing and business registration
requirements in North Carolina, see the contact information
for the offices of the Business ServiCenter, listed
in Section VI(a).
(c) Income and Franchise Taxes.
North Carolina has both an individual income tax and
a corporate income tax, as well as a franchise tax on
corporations. Each of these taxes, as it applies to
the various major types of business legal entities, is
discussed in this Section.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The North Carolina individual income tax is imposed
at a maximum tax rate of 7.75% in 2008,on taxable income
in excess of $100,000 for couples filing jointly (or over
$60,000 for a single taxpayer, or $80,000 for a head of
household).
Individual taxpayers pay North Carolina state income tax
on their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity, such
as a partnership, S corporation or LLC. A North Carolina
personal income tax return must be filed with the Department
of Revenue each year by the 15th of April.
Partnerships, or entities taxable as partnerships, such
as LLC's, are not subject to state income taxation in North
Carolina, but must file an information return with the
North Carolina Department of Revenue each year, showing
each partner's share of taxable income, losses, and credits,
on Form D-403. The partnership information
return is due by April 15th of the following year, in
the case of a calendar year partnership.
Partnerships with nonresident partners must withhold
state income tax on the nonresident's share of the partnership's
North Carolina income. No withholding is required if the partner
is not an individual and the entity files Form NC-NPA,
which is an agreement to pay the tax with its corporation,
partnership, trust or estate income tax return.
A nonresident individual who has no other North Carolina-source
income is not required to file a North Carolina income tax
return if the partnership has paid the state income tax on
the nonresident's share of the partnership's North
Carolina-source income.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income from
the business, will generally be required to make advance
payments of estimated North Carolina individual income taxes,
on Form NC-40, if their net tax liability
(not covered by withholding) equals or exceeds $1,000.
Estimated tax payments are due in four installments, on
the 15th day of the 4th, 6th, and 9th months of the taxable
year, and the 15th day of the first month of the following
year.
To avoid penalties for underpayment of estimated tax,
you must either pay in 90% of the current year's tax, or
100% of the previous year's tax.
The North Carolina corporate income tax rate on corporations
(other than S corporations) is 6.9% in 2008.
The state corporation income and franchise tax return, Form
CD-405, must be filed with the Department of Revenue each
year by the 15th day of the third month following the end of the
taxable year, or by March 15th in the case of a corporation whose
taxable year is the calendar year. Corporations pay both the
corporate income tax and the franchise tax on the same return,
as well as the corporation annual report fee of $25 per year.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year equals or exceeds $500. Estimated
tax payments are due in advance, in four equal installments,
on the 15th day of the 4th, 6th, 9th, and 12th months of the
taxable year. The total estimated tax that must be paid in is
usually equal to 90% of the actual tax liability for the year.
However, if the preceding tax year was a full year of
12 months, the current year payments need only be equal
to 100% of the prior year's tax liability, if less. Other
exceptions to the penalty may also apply.
These exceptions to the requirement that 90% of the tax
be paid in for the current year do not apply to "large
corporations," as defined under the federal Internal
Revenue Code (those having taxable income of $1 million
or more during any of the 3 preceding taxable years).
Otherwise, penalties will be imposed for failure to make
the required estimated tax payments on a timely basis.
The corporation franchise tax is an annual tax imposed on
corporations for the privilege of doing business in the state.
It does not apply to limited liability companies (LLC's). The
annual tax is equal to $1.50 for each $1,000 of the tax base,
which is the highest of the three following amounts:
The minimum amount of the annual franchise tax is $35.
S corporations are recognized under the North Carolina
tax law, and are generally treated the same as for federal
tax purposes. Thus they are usually not subject to the
state corporate income tax, but are subject to the franchise
tax. No separate state election of S corporation status is
required; a corporation that is a federal S corporation is
also an S corporation of North Carolina income tax purposes.
Note, however, that an S corporation that has nonresident
shareholders must file a nonresident shareholders' agreement
to pay North Carolina tax, or else must withhold North
Carolina state income tax on each nonresident shareholder's
proportionate share of the taxable income and remit the
withheld tax to the state. An S corporation may instead
choose to file a composite North Carolina income tax
return and pay the state income tax on behalf of some or
all of its nonresident shareholders.
TAXATION OF LIMITED LIABILITY COMPANIES
In North Carolina, a limited liability company (LLC) is
taxed in accordance with its tax classification under the
federal tax law.
Thus, unless it is classified as a C corporation or S
corporation, an LLC with more than one member will be taxed
as a partnership under both federal and North Carolina
income tax laws, thus avoiding the possible double taxation
of income that can occur with a corporation. An LLC is
generally not subject to the franchise tax on capital.
However, beginning in 2009, an LLC that is taxable as a
corporation for income tax purposes will also be subject
to the franchise tax.
Under IRS regulations, an LLC, unless it elects corporate
tax status, is treated as a partnership if it has more than
one owner, or as a sole proprietorship if it does not, for
federal tax purposes. North Carolina law now also permits the
formation of a single-member LLC.
If an LLC is taxable as a partnership and it has any
nonresident members, the LLC must withhold state income tax on
the income allocable to the nonresidents, unless the nonresident
members (entities that are not individuals) have entered into
agreements with the Department of Revenue to pay North Carolina
income tax on their income from North Carolina sources, on
Form NC-NPA.
Note that it is not always entirely clear whether an LLC is a
"single-member LLC" or not, where the "single owner" is a married
couple who hold the entire ownership of the LLC in some form of
co-tenancy, such as joint tenants with right of survivorship, tenants
by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, where a couple hold the LLC interest as community
property, ruling that the IRS will accept whatever choice the couple
make, either to disregard the LLC as an entity (treating it as a
"single-member LLC") or to treat it as a partnership between
the husband and wife.
However, North Carolina is not a community property state,
so where the LLC is owned by a husband and wife in some form of
co-tenancy, it is unclear whether the IRS treatment would be as
lenient as for community property owners, since the IRS has not
issued any published rulings on whether an LLC can be a disregarded
entity if held in one of the various forms of co-tenancy by a
married couple, rather than being held as community property. Thus,
it is also unclear, where an LLC is owned by a husband and wife
as co-tenants, whether North Carolina would treat the LLC as a
single-member LLC or as a partnership.
LLC's are not generally subject to the North Carolina franchise
tax, unlike corporations. However, under July, 2006 legislation,
LLC's that elect to be taxed as corporations will become subject
to the franchise tax, for tax years beginning in 2007 or later.
In addition, under the 2006 legislation, an LLC subject to the
franchise tax is allowed a tax credit against the franchise
tax equal to the difference between the annual report fee for
corporations ($25) and the (higher) $200 annual report fee for
LLC's, a difference of $175 at present.
(d) Sales and Use Tax.
North Carolina imposes a general sales tax on retail sales of
tangible personal property and certain types of services at
the statewide rate of 4.5%, effective beginning October 1,
2008, with a further increase to 4.75% on October 1, 2009.
In addition, local governments are allowed to adopt
local sales taxes, with counties and cities generally
imposing a 2.5% tax rate, plus an additional 0.5% transit
tax in Mecklenburg County, so that the total tax rate in
most counties will be 6.75%, 7% in six counties, and 7.25%
in Mecklenburg County, while the 4.5% state rate remains in
effect (October 1, 2008 through September 30, 2009).
Various classes of taxable items are subject to tax at
reduced rates of 1%, 2% or 3%, or at other reduced rates,
and most such items are fully exempted from the 1% local
option (county) sales taxes. The state sales tax rate on food
was reduced to 3% and 2% in 1997 and 1998 and was totally
eliminated as of May 1, 1999, although local sales taxes
continue to apply to food purchases. The exemption for food
purchases does not apply to prepared food, food sold through
a vending machine (50% of vending machine sales are taxable),
alcoholic beverages, soft drinks, candy, or dietary supplements.
Certain of the reduced-rate items also have a maximum
sales tax amount per item, such as $1,500 on a boat or an
airplane and $300 on a manufactured home.
Sellers are required to register with the Sales and Use
Tax Division of the State Department of Revenue and obtain
a sales tax identification number. Register on Form
NC/BR, which you can download or fill in on-line
at the Department of Revenue web site, at the web address
listed in Section VI(c). This will also
serve as your employer registration, if you are required to
withhold North Carolina state income tax from the wages of
employees. There is no fee to register for a sales tax number.
Sales and use tax payments and returns must generally
be paid and filed on a monthly basis. However, if the tax
liability is consistently less than $100 per month, you may
pay and file quarterly; if $10,000 or more per month, you
must pay the tax twice a month and file monthly returns.
Some of the major categories of goods and services that
are subject to sales or use tax in North Carolina include:
Major categories of goods or services that are exempt
from sales tax in North Carolina include:
Perhaps the most important exemption from the sales tax
is the resale exemption. If you are a wholesaler or retailer
who purchases goods that you will resell, your purchase
of such goods may qualify as an exempt sale for resale.
Similarly, if you sell goods to wholesalers or retailers
for resale by them, your sale may also qualify as an exempt
sale for resale. In any such transaction, the exemption is
ordinarily available only if the purchaser gives the seller
a valid resale certificate, certifying that the items are
being purchased for resale, and not for use or consumption
by the buyer. The Certificate of Resale, Form E-590,
has been replaced recently with the Streamlined Sales
Tax Agreement Certificate of Exemption, Form E-595E.
A shadow tax, the use tax, is also imposed at the same
rate as the sales tax. It is primarily intended to tax
property that is acquired from sources outside of the state,
in transactions not subject to sales tax, when such property
is used or consumed within North Carolina. Use tax may
also apply to items purchased on an exempt basis, such as
for resale, if such items end up being used or consumed,
instead of being resold.
For more information on North Carolina sales and use
tax registration and compliance, see contact information
for the offices of the Department of Revenue, listed in
Section VI(a).
(e) Real and Personal Property Taxes.
In North Carolina, as in every other state, any business
real estate you own will be subject to real property taxes.
In general, there is little that you must do, unless you
wish to challenge your assessed valuation, since the
assessor will bill you for each year's property taxes as
they come due.
North Carolina also imposes personal property taxes on
tangible personal property, generally. ("Personal property"
is any kind of property that is not real estate.) However,
the inventories of contractors, wholesalers, retailers, and
manufacturers are exempt from state or local property taxes.
North Carolina formerly imposed a statewide personal
property tax on many types of intangible personal property,
but this tax was repealed in 1995. Computer software is
generally exempted, as well, unless it is "embedded" software
(such as system software in a computer) or software whose
cost is capitalized on the books of the taxpayer.
Each year, businesses are required to provide a list of
their business personal property to the county assessor of
the county in which the business is located and to also
list any improvements to their real property, such as newly
built structures or remodeling of existing structures.
(f) Other Business Taxes.
North Carolina imposes a number of excise and other taxes on
businesses, including:
The state formerly imposed a chain store tax, which
was based on the number of stores a company had in North
Carolina, but this tax was repealed as of January 1, 1997.
(g) Trade Names.
A trade name, also known as a fictitious or assumed name, is
any name used in the course of business that does not include
the actual legal names of all the owners of the business.
Thus, if your business goes by any name other than your own
real name, it is operating under a trade name. The same is
true of a corporation, if it operates under a name other than
its legal name. A trade name might also be one that suggests
the existence of additional owners, by using such words as
"company," "associates," or "group."
In most states where you do business, it will be necessary
to register a trade, fictitious, or assumed name, so that
people who do business with you can find out who the actual
owners of your business are. You may also want to register
any such trade name, as a means of protecting against other
companies usurping that particular trade name.
If your business operates under an assumed name in
North Carolina, you must generally file an assumed name
registration certificate with the register of deeds in
each county where you do business under the assumed name.
However, professional partnerships or professional LLC's
are generally exempted from this requirement, if they file
a list of partners or members with the appropriate state
professional licensing board.
Note that while the North Carolina "assumed name" statute
states that limited partnerships, as well as other forms of
business, are required to register assumed names with each
county where the assumed name is used, the state's partnership
law seemingly exempts limited partnerships from having to
comply with the North Carolina "assumed name" statute.
Thus, the assumed name registration requirement for limited
partnerships is somewhat unclear, due to the contradictory
state laws.
V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since North Carolina imposes a state income tax on the income of individuals, you will need to also withhold North Carolina income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Revenue, on Form NC/BR, which will also serve as your registration for a sales tax identification number. Employers are required to pay and report withheld tax on a quarterly or more frequent basis, depending upon the amount of average monthly withholding, as follows:
If an employer remits an average of at least $20,000 per month in North Carolina withholding taxes, it must make payments by electronic funds transfer (EFT). For more information on North Carolina income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Revenue, listed in Section VI(a). NON-WAGE WITHHOLDING If you make payments to a nonresident "contractor" (as defined) that exceed $1,500 in a calendar year, you will also be required to withhold North Carolina state income tax, at a flat rate of 4%. The payments on which withholding is required are compensation (other than wages) for personal services in North Carolina in connection with a performance, athletic event, entertainment, speech, or creation of a film, radio, or television program. This requirement will also apply to any payments made for such services to a foreign limited or general partnership that has no permanent place of business in the state or to payments to a foreign LLC or corporation, unless the entity has a certificate of authority to do business in North Carolina. Be sure to withhold tax from payments to such nonresident independent "contractors," or you will be subject to penalties. (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Also, an employer who acquires all or any portion of a liable business in North Carolina is immediately subject to the tax. Employers subject to the North Carolina unemployment tax are required to register with the Employment Security Commission by completing Form NCUI 604, Employer Status Report and submitting this form for a determination of liability status. New employers are required to pay tax at a rate of 1.2% in 2008 on the first $18,600 of wages paid to each employee. A 0.2% training and reemployment tax has been added to the basic rate of 1.0% for the years 2000 and later. Even so, North Carolina has one of the lowest unemployment tax rates of any state, for new businesses. After you have had employees for approximately two years, your business will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, may be lower than the standard new employer tax rate you initially were paying. No employer will be granted an experience tax rate below the standard new employer rate until its account has been chargeable with benefits for at least 12 calendar months (or 4 calendar quarters) before the preceding July 31st. In November of each year, active employers will be mailed Form NCUI 104, Unemployment Tax Rate Assignment, showing the calculation of the tax rate for the succeeding calendar year. Experience rating accounts are maintained for rating purposes only. This statement requires no payment, nor can it be used to pay tax due. The tax rate shown on the Form NCUI 104 becomes final unless protested in writing prior to May 1 of the following year. All state unemployment taxes are imposed upon you as the employer, and, under North Carolina law, cannot be charged to your employees or withheld from their wages. For more information on your North Carolina unemployment tax obligations as an employer, see the contact information for the offices of the Employment Security Commission of North Carolina, Unemployment Insurance Division, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In North Carolina, virtually all businesses with three or more employees are required by law to have workers' compensation insurance, except those able to self-insure. However, certain agricultural employers with fewer than 10 regular employees, certain sawmill logging operators, and all domestic (household) employers with fewer than 10 employees are exempt. Firms having one or more employees who are engaged in activities in which radiation is used or is present are not exempt, however. IMPORTANT NOTE: Corporate officers may be exempted from coverage, but are counted in determining whether the business has three or more employees. Sole proprietors, partners in a partnership, and members of an LLC are not required to be covered, but may elect to be covered if they are actively engaged in the operation of the business and if the insurer is notified of their election to be covered. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice (Form 17) in the workplace informing your employees of their workers' compensation coverage under the North Carolina Workers' Compensation Act. In addition, you, or your insurance carrier, must submit a Form 19, Employer's Report of Employee's Injury to the Industrial Commission, to the Industrial Commission within 5 days of the occurrence or report of an injury for which the attention of a physician is needed or actually sought. For more detailed information regarding your obligations as an employer under the North Carolina workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the North Carolina Industrial Commission, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the North Carolina wage-hour laws, which currently provides for a state minimum hourly wage of $6.15, since January 1, 2007, which increased along with the federal wage to $6.55 an hour on July 24, 2008. The North Carolina minimum wage will increase at the same time and to the same level as the federal minimum wage in the future, when the federal minimum wage becomes higher, to $7.25 an hour on July 24, 2009. Like federal law, North Carolina requires employers to pay overtime at time-and-a-half rates to an employee who works more than 40 hours in a week, except for certain exempt employees. A private sector employer cannot give comp time to its non-exempt employees in lieu of paying time and one-half overtime pay based on an employee's regular rate of pay, and merely being paid a salary in itself does not exempt an employee from the state's minimum wage and/or overtime pay requirements. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the North Carolina wage-hour rules. Also, outside salespersons and certain computer programmers, systems analysts, and software engineers, as defined in the federal overtime laws and regulations, are exempted. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, also providing information to employees on workers' compensation, workplace safety and health laws, and unemployment insurance. You can obtain the poster from the Wage and Hour Bureau of the North Carolina Department of Labor. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be aware of similar state child labor laws, in North Carolina. A youth employment certificate is generally required before you may hire a minor under 18, except for newspaper delivery. Other North Carolina child labor restrictions include the following:
For more information on North Carolina wage/hour, child labor, and other state labor laws, see the contact information in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering federal OSHA laws and the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. North Carolina is one of the states that has its own OSHA-type agency and has generally adopted the federal OSHA standards. To determine if your workplace is in compliance with federal and North Carolina job safety requirements, you may wish to contact the Division of Occupational Safety of the North Carolina Department of Labor and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This treatment differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. Employers with 11 or more employees may, depending on the employer's safety rating, be required to establish a safety and health committee composed of management and employee representatives. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Division of Occupational Safety, listed in Section VI(a). The North Carolina Department of Labor provides a single poster that covers state labor law requirements regarding occupational safety and health, as well as workers' compensation, minimum wage/overtime laws, and state unemployment insurance, all in one poster. (f) Other Miscellaneous State Labor Laws. Other North Carolina labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Employers are required to designate a payday, which can be daily, weekly, semimonthly or monthly, in general. Whatever the regular payday may be, you must pay final wages to any employee who quits or is terminated no later than the next regular payday, and must make payment by mail if the terminated employee requests it. Employers are required to notify employees, orally or in writing, at the time of hiring, of promised wages and the day and place of payment. Employees must also be notified, in writing or by posting in the workplace, of employment practices and policies with regard to promised wages. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. North Carolina has a right-to-work law, which prohibits an employer from making union membership a condition of employment or continuation of employment by such employer. (3) State anti-discrimination laws. In addition to compliance with federal anti-discrimination laws, employers of 15 or more employees must also be aware of and comply with state civil rights laws in North Carolina, and must display a poster informing employees of their rights. You can obtain this poster from the Raleigh office of the Human Relations Commission, or from the Employment Discrimination Bureau of the North Carolina Department of Labor, at the addresses listed in Section VI(a). North Carolina law prohibits discrimination in employment based on race, religion, color, national origin, age, sex or handicap, by employers with 15 or more employees. In addition to the foregoing prohibitions on job discrimination for employers with 15 or more employees, state law also prohibits ALL employers from discriminating in employment based on:
(4) Reporting new hires. Under new federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the State Directory of New Hires reporting program, for North Carolina employers) within 20 days after the date of hire. Employers filing electronically must file reports twice a month (if there are new hires to report), on dates between 12 and 16 days apart. See the address information for filing such reports, in Section VI(a). Or, to register for new hire reporting online or file reports online, see the link to the State Directory of New Hires listed in Section VI(c). (5) North Carolina Family Leave and Parental Leave Laws. North Carolina does not have a general family or parental leave law. However, state law does require that all employers of any size grant employees at least 4 hours leave per year (per employee) for parental involvement in their children's schools. Such leave need not be paid time off, and any leave that is granted is subject to the following conditions:
VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. North Carolina, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, the Business ServiCenter, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. Due to the business community's need for assistance with the licensing and registration process, Business ServiCenter has established an accessible, one-stop system online which assists the business community with identifying, acquiring and maintaining the licenses and permits needed to conduct business in North Carolina. The Business ServiCenter serves new and existing businesses by:
To obtain business registration forms and information on starting or relocating your business in North Carolina, contact: North Carolina Department of Commerce Addresses and other contact information for other key state and federal government agencies in North Carolina, mentioned in preceding sections of this book, are listed below for your convenience. OFFICE OF THE SMALL BUSINESS OMBUDSMAN. This agency has been set up specifically to assist small businesses in complying with state government requirements, with an emphasis on environmental issues. For assistance, contact: Gail McDonald SECRETARY OF STATE. Contact the office of the secretary of state for information on:
North Carolina Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the North Carolina Department of Revenue, which is the main tax collection agency in North Carolina. Also register with this agency as an employer, for state income tax withholding purposes. North Carolina Department of Revenue STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
North Carolina Department of Labor STATE LICENSES. The Business ServiCenter is the main North Carolina agency you should contact about business licensing in the state. See the contact information listed above for that agency. STATE SALES TAX. Obtain your sales and use tax license or permit and information on the North Carolina sales and use tax law from the Department of Revenue, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Employment Security Commission NEW HIRE REPORTING. Report newly hired employees within 20 days of hiring (or twice a month, if filing electronically), to the following address in Georgia (yes, Georgia, not a misprint): North Carolina State Directory of New Hires WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: North Carolina Industrial Commission STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in North Carolina, contact: Division of Occupational Safety and Health STATE ANTI-DISCRIMINATION LAWS. Contact the North Carolina Human Relations Commission (below) for more detailed information on North Carolina civil rights laws that may apply to your business. Contact the North Carolina Department of Labor (listed above), Employment Discrimination Bureau, to obtain the anti-discrimination notices you are required to post in the workplace. North Carolina Human Relations Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout North Carolina to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. North Carolina Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major North Carolina state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in North Carolina. Since new sites are appearing frequently, you might also want to search for other North Carolina government Web sites by using one of the popular Internet search engines, such as Google, Lycos, Altavista, or Yahoo. To start your Internet search for North Carolina government information, you may want to begin with the following Internet sites: State of North Carolina Web page: North Carolina Department of Commerce (Business ServiCenter, for help in obtaining state permits and licenses and other small business assistance): Secretary of State Web page (corporate, LLC and partnership filings): North Carolina Department of Revenue: North Carolina Department of Labor Web site: Employment Security Commission of North Carolina (state unemployment tax): North Carolina Industrial Commission (workers' compensation) Web page: North Carolina New Hires Reporting web page (download forms or file reports of new hires on-line): North Carolina Human Relations Commission (anti-discrimination agency): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in North Carolina, or contact the following state agency: Department of Commerce The address of the SBA District Office in North Carolina is: U.S. Small Business Administration |
Copyright © 2008 Michael D. Jenkins
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