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STARTING AND OPERATING A BUSINESS IN NORTH DAKOTA Copyright © 2007, Michael D. Jenkins
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION North Dakota has a fairly typical tax and legal structure under which businesses must operate, not significantly unlike most other states. Like most states, North Dakota imposes an income tax, a sales and use tax, various excise taxes, with property taxes imposed at the local level. However, it is a very business-friendly state:
The state has adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in North Dakota in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. At present, the state's economy is very robust, in terms of the level of unemployment and other economic measures. For example, in June, 2007, North Dakota's unemployment rate was only 3.e%, unchanged from a year earlier, and one of the lowest rates of unemployment in the nation. This compares quite favorably to a national unemployment rate of 4.5% for June, 2007. To view the latest federal Bureau of Labor Statistics unemployment rate data for North Dakota or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in North Dakota can do so 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 Dakota law also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like 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 Dakota can be formed 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 make any sales 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 Dakota 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 Dakota income tax and filing requirements for individuals. Doing business as a sole proprietor in North Dakota is generally 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 secretary of state, as discussed in Section IV(g). (c) Partnerships. North Dakota'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 you operate 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 Dakota. 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). UPDATE NOTE: Partnerships are required to file an annual tax information return with the state. For details on North Dakota partnership tax return filing requirements, 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 Dakota 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). A general partnership may, if desired, file a Statement of Partnership Authority with the secretary of state, together with payment of a small fee. The Statement of Partnership Authority may list the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership. It may also state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other specified matters. 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 Dakota 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 $100. Foreign limited partnerships must also register before being allowed to do business in North Dakota, and must pay a registration fee of $100. Limited partnerships, domestic or foreign, are required to file annual reports with the secretary of state by April first of each year and pay an annual filing fee of $25. Failure to file can result in legal dissolution of a domestic limited partnership if delinquent by more than 6 months, or loss of authorization to conduct business in the state, in the case of a foreign limited partnership. For forms and information on limited partnership filing requirements, see the contact information for the offices of the North Dakota Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLPs) are a relatively new form of partnership permitted under the laws of North Dakota. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and North Dakota 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. Partners in a general partnership or the general partners of a limited partnership can achieve limited liability by simply registering the partnership with the state as an LLP or as a limited liability limited partnership. The North Dakota LLP law specifically provides that case law regarding "piercing the veil" of limited liability for corporations is to be applied equally to LLPs, but taking into account the differences between corporations and partnerships, and also provides that the use of informal procedures or arrangements for the management and conduct of a business is not a ground for piercing the limited liability shield of an LLP. To form an LLP in North Dakota, you must register and pay a filing fee of $25 ($35 after June 30, 2008) to the secretary of state. Where the LLP has more than two managing partners, an additional fee of $3 for each managing partner in excess of two must also be paid, up to a maximum of $250. Foreign LLPs, those created under the laws of another state, must register with the secretary of state and pay a fee of $50, which will increase to $60 after June 30, 2008. Effective since August 1, 2001, the managing partner of a domestic or foreign LLP, if it is one of several types of listed entities, must register separately with the Secretary of State at the time the LLP registers. The North Dakota LLP law now allows formation of limited liability limited partnerships (LLLPs), which can offer greater liability protection to the general partners of the LLLP. Limited liability limited partnerships must pay the same fees as other limited partnerships, $100 for a certificate of limited liability limited partnership, or $100 to register a foreign limited liability limited partnership. Every LLP doing business in North Dakota, including both domestic and foreign LLPs, as well as LLLPs, must file an annual report by April first of each year and pay a $25 annual reporting fee. For more information on LLP or LLLP 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 LLPs, if you will do business in other states besides North Dakota, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California, Nevada, and New York, only recognize certain types of professional partnerships as LLPs. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. Some states will also deny your LLP limited liability status if you do business there without first registering as a foreign LLP in such state, although most states will simply deny an LLP the right to maintain a lawsuit in the state's courts until the LLP has registered for authority to do business in that state. (d) Corporations. To form a corporation in North Dakota, you must file articles of incorporation with the North Dakota Secretary of State and pay a filing fee, effective as of July 1, 2007, of $90 ($100 after June 30, 2008) plus a $10 consent of registered agent fee. The former license fee that was charged at incorporation, based on the amount of authorized capital stock, was repealed as of July 1, 2007. 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 Dakota, by filing an application for a certificate of authority and paying a filing fee of $135 ($145 after June 30, 2008). Until recently, a foreign corporation had to pay a filing fee of $40 plus a license fee of $85 when applying for a certificate of authority. The secretary of state would then compute an additional license fee, determined as though the foreign corporation were domestic, based on its capital stock allocable to its business in North Dakota, which would be assessed when the foreign corporation filed its annual report. However, the license fee on foreign corporations, like the license fee on domestic corporations, has now been repealed, effective since July 1, 2007. For more information on filing articles of incorporation or applying for a certificate of authority to do business in North Dakota, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and a filing fee of $25 with the secretary of state each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in North Dakota must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in North Dakota, see the contact information for the Office of State Tax Commissioner, 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 Dakota recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. State law permits an S corporation that has nonresident shareholders to file a composite tax return and to pay the individual income tax of the nonresident shareholders on their behalf. For taxable years beginning in 2006 or later, withholding is required for S corporation shareholders who are nonresidents, on their distributive share of the S corporation's North Dakota income. (f) Limited Liability Companies. North Dakota, 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 Dakota may also choose to operate in the form of an LLC. In most states, including North Dakota, LLCs 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 tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under North Dakota tax laws. North Dakota generally treats LLCs in the same manner as they are treated for federal income tax purposes. To form an LLC under the laws of North Dakota, one or more persons must file articles of organization with the secretary of state, which must be accompanied by filing fees of $125, or $135 after June 30, 2008. Unlike some other states, North Dakota allows professional persons to form professional LLCs. North Dakota state law allows formation of one-owner LLCs, which now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in North Dakota, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $125, or $135 after June 30, 2008. In addition to initial filing fees, an LLC formed in North Dakota must subsequently file annual reports by November 16th each year and pay a filing fee of $50 with each such annual report. A foreign LLC is also required to file an annual report and pay the applicable filing fee of $50. 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 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. North Dakota is one of the states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in North Dakota. (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 occurs. In North Dakota, you should obtain tax releases for state unemployment taxes from Job Service North Dakota, and for the seller's sales and use tax liability from the Office of the State Tax Commissioner. A sales tax seller's permit is not transferable; when a business is sold, all sales and use taxes collected by the selling business become due and payable immediately, and as buyer, you will need to apply for your own seller's permit. The holder must immediately notify the Tax Commissioner and surrender the holder's permit for cancellation. Within 15 days, the holder must file a final sales tax return and remit all sales taxes due. (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 find out if you may or must obtain the seller's experience rating as a successor employer, you will need to contact Job Service North Dakota on a timely basis after acquiring an existing business that has employees. The general rule is that an acquiring employer may apply to Job Service North Dakota for a transfer of the seller's experience rating, if acquiring part or all of the seller's business, although the agency may disallow the experience rating transfer if it determines the acquisition was done solely or primarily for the purpose of obtaining a lower unemployment tax rate. If the seller files a written protest within 15 days of being notified of the buyer's application, the transfer will not be allowed. If the buying and selling businesses, at the time of the sale, are found to be under common ownership, management, or control, the transfer of the seller's experience rating will be mandatory. PLANNING POINT: EXAMPLE: IV. NORTH DAKOTA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
North Dakota has relatively low income tax rates for individuals
and moderate tax rates for corporations, in the maximum brackets.
Both individual and corporate tax rates are graduated, and the
maximum individual rate of 5.54% does not apply until taxable
income exceeds $349,700 (in 2007).
In addition, there is no corporation franchise tax in North
Dakota, unlike many other states. Previously, the corporate tax
rate was as high as 10.5%, but federal corporation income tax
was allowed as a deduction. However, for tax years beginning
after December 31, 2003, the maximum corporate tax rate is
reduced to 7%, but federal income tax is no longer deductible.
The maximum rate of 7% applied only to corporate taxable income
in excess of $30,000 in 2006 and this rate decreased further,
to 6.5%, for taxable years beginning after December 31, 2006.
North Dakota is one of only a few states that does not
generally allow localities to tax either tangible or intangible
personal property used in a business, for property tax purposes.
New or expanding businesses locating in the state may even
qualify for 5-year or longer "tax holidays" during which they
pay no real property taxes, and may negotiate payments in lieu
of regular local taxes with local governments, for periods of
up to 20 years. In addition, new or expanding businesses may
be granted an exemption from state income taxes for up to 5
years, with the approval of the State Board of Equalization.
North Dakota is a generally business-friendly environment,
and it does not impose an annual franchise tax or capital
values tax on corporations or other businesses, and, along
with Idaho, is the northern-most state in the U.S. that has
a right-to-work law.
(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 Dakota 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.
For help with state licensing and business registration
requirements in North Dakota, see the contact information
for the offices of the North Dakota Department of Commerce,
Division of Economic Development and Finance, listed in
Section VI(a). Also, you may want
to contact the North Dakota State University Extension
Service to request their Publication EC752, Business
Reports, Forms and Licenses Required in the State of North
Dakota, published in 2005. See the contact
information for the Extension Service in Bismarck, listed
in Section VI(a).
(c) Income and Franchise Taxes.
North Dakota has both an individual income tax and a corporate
income tax, but has no franchise tax on corporations. The
application of the state income taxes to each of the major
types of business legal entities is described in this
Section.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The North Dakota individual income tax is imposed at a
maximum tax rate of 5.54%, on income in excess of $349,700,
in 2007. The vast majority of North Dakota taxpayers file
Form ND-1, and take advantage of this low
tax rate, but are not allowed to deduct federal income taxes
paid. However, if the tax is lower, you may instead file an
optional Form ND-2, and pay state income tax
at higher rates of up to 12%, but with a deduction for your
federal income tax liability and certain other special
deductions not allowed for filers of Form ND-1.
Individual taxpayers generally pay 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. The North Dakota
personal income tax return is Form ND-1 or
Form ND-2, one of which must be filed each
year with the Office of the State Tax Commissioner.
Pass-through entities with nonresident owners may
file composite tax returns and pay tax on behalf of the
nonresidents on their taxable income from North Dakota
sources, at the highest marginal state tax rate. The
nonresidents may then file nonresident North Dakota
income tax returns and claim a credit for the tax paid
by the pass-through entity. However, beginning in taxable
years 2006 and later (for returns filed in 2007 or later,
generally), pass-through entities are required to withhold
state income tax with regard to their nonresident owners,
at the rate of 5.54% of the nonresident's distributive
share of the entity's North Dakota taxable income for the
taxable year, unless a composite return is filed which
includes the nonresident.
Partnerships, or entities taxable as partnerships, such
as LLCs, are not subject to state income taxation in North
Dakota, but must file an information return with the State
Tax Commissioner each year, showing each partner's share
of taxable income, losses, and credits, on Form 58.
However, as noted in the preceding paragraph, for taxable
years beginning in 2006 or later, all partnerships (and
other pass-through entities -- S corporations and LLCs
that are treated as partnership) are now required to withhold
state income tax on the distributive share of North Dakota
income allocable to any nonresident partner, member, or S
corporation shareholder.
The partnership information return is due by April 15th of
the following year, in the case of a calendar year partnership.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLCs, or
shareholders in S corporations), who have taxable income from
the business, will generally be required to make advance
payments of estimated North Dakota individual income taxes,
on Form 400-ES, if their net tax liability
(not covered by withholding) exceeds $500 and also exceeded
$500 in the preceding tax year. 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 Dakota corporate income tax rate, on corporations
other than S corporations, is imposed at graduated rates of
up to 6.5% in 2007 (7% in 2006), on taxable income in excess
of $30,000. North Dakota no longer allows a corporation to
deduct its federal income tax liability in arriving at taxable
income for state income tax purposes, for tax years beginning
after December 31, 2003. Previously, the top tax rate for
corporations was 10.5%, but a corporation could deduct its
federal income tax liability, which could lower its effective
state tax rate to slightly below 7%, if it paid federal tax
at a 35% rate. After December 31, 2006, the top tax rate on
corporations decreased from 7% to 6.5%.
The 2006 and 2007 tax income tax rate schedules for
corporations are as follows:
The state corporation income tax return is Form 40,
which must be filed with the State Tax Commissioner by the
15th day of the fourth month following the end of the taxable
year, or by April 15th in the case of a corporation whose
taxable year is the calendar year.
A corporation is required to make estimated tax payments
of its state corporate income tax in advance, if its tax
liability for the year is expected to exceed $5,000 and if
the prior year tax was more than $5,000. Estimated tax
payments are due in advance, in four equal installments,
on the 15th day of the 4th, 6th, and 9th months of the
taxable year, and on 15th day of the first month of the
following tax 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 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.
Payments are made with Form 40-ES.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
S corporations file Form 60. Any corporation
that files as an S corporation for federal income tax purposes
must also file as an S corporation for North Dakota purposes. No
separate North Dakota S corporation election is required.
As under federal tax law, S corporations are generally not subject
to tax on their income by North Dakota. However, for taxable years
that begin in 2006 or later, new North Dakota tax legislation
requires S corporations and other pass-through entities
(partnerships or LLCs taxable as partnerships) to withhold state
income tax on any nonresident shareholder's distributive share of
the S corporation's North Dakota income.
North Dakota has no corporate franchise tax on capital or net
worth. However, until recently the state imposed a one-time license
fee or tax at the time of incorporation, or after a foreign
corporation registered to do business in the state. The license fee
was based on a corporation's authorized capital stock and additional
fees were imposed subsequently when the number of authorized shares
increased. However, this license fee has been repealed, for
corporations formed on or after July 1, 2007 or for foreign
corporations applying for a certificate of authority on or after
that date.
TAXATION OF LIMITED LIABILITY COMPANIES
In North Dakota, a limited liability company (LLC) will
be taxed in the same manner as a partnership, thus avoiding
the possible double taxation of income that can occur
with a corporation, if it is so treated for federal tax
purposes. If it has only one member, and is not treated
as a corporation for federal purposes, it is disregarded
as a taxable entity for North Dakota income tax purposes.
Under IRS regulations, an LLC may elect to be treated as
a partnership if it has more than one owner, or as a sole
proprietorship (a disregarded entity) if it does not, for
federal income tax purposes. North Dakota law now recognizes
the validity of a one-owner LLC and follows the federal
treatment of a one-owner LLC.
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 Dakota 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 Dakota would treat the LLC as a
single-member LLC or as a partnership.
While LLCs that are treated as partnerships for North Dakota
income tax purposes are not taxed by the state, they must, like
partnerships, file partnership tax returns and, beginning with
the 2006 taxable year, must withhold North Dakota income tax at
the rate of 5.54% on any nonresident member's share of the
LLC's North Dakota taxable income.
(d) Sales and Use Tax.
North Dakota imposes a general sales tax on retail sales of
tangible personal property and certain types of services at
the statewide general rate of 5%. Higher or lower rates apply
to certain types of gross receipts, such as a 2% tax (1% from
January 1, 2008 through June 30, 2009) on retail sales of
natural gas to consumers, and a 3% tax rate applies to retail
sales of new farm machinery and new irrigation equipment used
exclusively for agricultural purposes, and to new mobile homes.
Higher rates apply to gross receipts from sales of alcoholic
beverages (7%). A higher rate on gross receipts from lodgings
(6%) expired after 2005, but cities may adopt local lodgings
taxes, which many do.
In addition, local governments are allowed to adopt local
sales taxes, generally at a 1% rate, with local tax generally
being applicable only to the first $2,500 of the purchase
price of an individual item until recently. However, the
$2,500 cap no longer applies after September 30, 2005, as
North Dakota has acted to comply with the Streamlined Sales
Tax Project. The city of Fargo reduced its local sales
tax rate from 1.5% to 1%, effective July 1, 2006.
A number of other changes in the law became effective on
October 1, 2005 or more recently, including:
Sellers are required to obtain a seller's permit and to
collect and pay over the state and local sales and use
taxes to the Office of the State Tax Commissioner.
North Dakota is one of only a few states that has
continued to impose its sales tax on Internet access
charges, since it was already doing so before enactment
of the Internet Tax Freedom Act in 1998. Sales tax is
also imposed on sales of pre-written computer software,
but not custom software.
New or expanding businesses may qualify for a sales tax
exemption on machinery, building materials, and equipment
used for manufacturing, processing or recycling. There is
no sales tax on electricity or water in North Dakota.
There are numerous other exemptions from the sales tax,
the most important of which 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.
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 Dakota. 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.
Before making any taxable sales, you will need to register
with the Office of the State Tax Commissioner, filing a
Application to Register for Income Tax Withholding
and Sales and Use Tax Permit. No fee is required
for obtaining a permit, but in some cases the State Tax
Commissioner may require a vendor to post a surety bond.
For more information on North Dakota sales and use tax
registration and compliance, see contact information for
the offices of the State Tax Commissioner in
Section VI(a).
(e) Real and Personal Property Taxes.
In North Dakota, 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. Tax for the preceding
year is due by March 1 of the following year. You are allowed a
5% discount if payment is made by February 15th.
If you are starting or expanding a business in the state,
you may be granted a 5-year or longer exemption from real
property taxes. In addition, local governments can enter
into reduced property tax agreements for up to 20 years with
businesses that start up or expand facilities in a given
locality.
North Dakota, unlike most other states, does not impose
any property taxes on personal property of any kind,
either tangible or intangible, except for a few special
industries that are centrally assessed by the state board
of equalization, such as oil and gas and utilities, and
certain items such as mobile homes. ("Personal property"
is any kind of property that is not real estate.)
(f) Other Business Taxes.
North Dakota imposes a number of excise and other taxes on
businesses, some of which may affect you. These include:
(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. A sole proprietorship or corporation doing business in North Dakota under a trade name is required to register the name with the secretary of state and pay a filing fee of $25. The registration must be renewed every five years, to remain effective. A partnership, other than a limited partnership, that does business in North Dakota under a fictitious name or a name that does not show the names of all the partners must file a fictitious name certificate with the secretary of state and pay a fee of $25 plus an additional fee of $3 for each partner in excess of two, up to a maximum fee of $250. Foreign partnerships, doing business outside the United States under a fictitious name as well as in North Dakota, are not required to file a fictitious name certificate. A general partner must be registered separately with the secretary of state at the time of filing a fictitious name certificate whenever that general partner is a corporation, limited liability company, limited partnership, general partnership using a fictitious name, or is another type of organization required to register with the secretary of state. 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 Dakota imposes a state income tax on the income of individuals, you will need to also withhold North Dakota income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the State Tax Commissioner as an employer. You can register, on a single form, North Dakota Application to Register for Income Tax Withholding and Sales and Use Tax Permit, for both employer withholding and a sales and use tax permit. However, this form does not register you for state unemployment taxes; you will need to register separately as an employer for unemployment tax with Job Service North Dakota, as discussed in Section V(b). Withheld state income tax is generally required to be remitted quarterly on Form 306, but some small employers who withhold less than $500 of North Dakota income tax per year may be eligible to file an annual withholding tax return. For more information on North Dakota income tax withholding and registration requirements for employers, see the contact information for the offices of the State Tax Commissioner, listed in Section VI(a). (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. Employers subject to the North Dakota unemployment tax are required to register with Job Service North Dakota on the Report to Determine Liability form, and to obtain a state employer identification number for unemployment tax purposes. The state employer identification number will be the same as an employer's federal identification number, but with a two-digit number, e.g., "01," added to the end of the number. New employers are required to pay tax at a rate of 1.6% in 2007 (8.09% for construction) on the first $21,300 of wages paid to each employee. The rate for new non-construction employers with a negative account balance is 5.18%. After you have had employees for a while, you 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, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under North Dakota law, cannot be charged to your employees or withheld from their wages. For more information on your North Dakota unemployment tax obligations as an employer, see the contact information for the offices of Job Service North Dakota, Tax Section, 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 Dakota, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Self-employed persons and corporate directors who are not employees are not required to be covered by workers' compensation, but may elect voluntary coverage in some cases. An employer is not required to provide coverage for his or her spouse or child under age 22. In addition, licensed real estate brokers or salespersons may also be exempt, if paid on a commission basis and if certain other requirements are met. 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 by obtaining and posting the workers' compensation poster, obtainable from North Dakota Workforce Safety & Insurance, in your workplace. Despite a 6% rate increase on July 1, 2004, workers' compensation insurance rates in North Dakota are the lowest in the nation, and insurance premiums are computed on only a portion of each employee's wages (on the first $21,300 of wages per employee, at present, for the 2007-2008 fiscal year). In 2006, rates were only $1.24 per $100 of payroll in North Dakota, compared to $5.23 in California, which has the nation's highest workers' compensation premium rates. However, effective July 1, 2006, the minimum premium for small employers was increased from $125, which had been the minimum since 1994, to $250. About 6,200 of approximately 20,000 North Dakota employers pay the minimum premium. For more detailed information regarding your obligations as an employer under the North Dakota workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the North Dakota Workforce Safety & Insurance, 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 Dakota wage-hour laws, which provide for a state minimum hourly wage that is the same as the federal minimum ($5.15 an hour before July 24, 2007, then increasing to $5.85 an hour; $6.55 as of July 24, 2008; and $7.25 as of July 24, 2009). Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the North Dakota wage-hour rules, as are some commissioned salespersons. State law, like federal, also provides that time-and-a-half must be paid for overtime hours worked in excess of 40 hours per week. North Dakota also has detailed rules regarding employee work breaks or meal periods:
Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, the North Dakota Minimum Wage & Work Conditions Summary poster, which you can obtain from the North Dakota 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 cognizant of similar state child labor laws, in North Dakota, which apply to minors under the age of 16. These requirements and restrictions on youth employment under North Dakota labor laws include the following:
To obtain required state wage-hour posters and for additional information about your obligations as an employer under North Dakota's labor laws, see the contact information in Section VI(a) for the North Dakota Department of Labor. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering 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 Dakota is one of the states that does not have its own OSHA-type agency. Employers in North Dakota must comply with federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. The federal Occupational Safety and Health Administration (OSHA) enforces health and safety standards in the state of North Dakota. However, some state safety standards for certain industries are set and enforced by North Dakota Workforce Safety & Insurance, which also administers the state's workers' compensation program. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a safety consultation from the North Dakota OSHA Consultation Program at Bismarck State College and they detect violations, you will not be cited if you promptly correct the unsafe conditions. 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 Bismarck offices of federal OSHA, as well as the state consultation office at Bismarck State College, both of which are listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other North Dakota labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. When an employee quits work, final wages must be paid to the former employee by the next regular payday. If an employee is discharged from employment, the final wages must be paid on the next regular payday. If the employer fails to make the wage payment on a timely basis, the employee will continue to accrue full wages up till the date payment is made, but not to exceed 30 days' pay after the date employment terminated. (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 Dakota has a right-to-work law, and is the northern-most state (along with Idaho) that has such a law. The law prohibits an employer from denying the right to work to any person on account of their membership or non-membership in a labor union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, all employers must also be aware of and comply with state civil rights laws in North Dakota. For more information on North Dakota civil rights laws as they affect employers, contact the Human Rights Division of the Bismarck office of the North Dakota Department of Labor, at the address listed in Section VI(a). North Dakota law prohibits discrimination in employment based on race, color, national origin, religion, age, sex, disability, marital status, being a recipient of public assistance, or due to engaging in any lawful activity during non-working hours which is not in direct conflict with the essential business-related interests of the employer. The term "discriminate," for purposes of sex discrimination, includes sexual harassment. (4) Reporting new hires. Under the federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the North Dakota Department of Human Services for North Dakota employers) within 20 days after the date of hire. If reports are transmitted electronically or magnetically, they must be submitted twice a month, if necessary, not less than 12 days nor more than 16 days apart. See the contact information for reporting New Hires in Section VI(a). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike some other states, North Dakota does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of North Dakota. Accordingly, you will need to contact the various North Dakota government agencies that are mentioned in this book or listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in North Dakota is the Division of Economic Development and Finance, which is a division of the North Dakota Department of Commerce. They offer a helpful booklet, State of North Dakota New Business Registration Forms, which contains all required registration forms to begin business in North Dakota, plus handy information request forms. Contact this agency at: North Dakota Department of Commerce SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the North Dakota State Tax Commissioner, which is the main tax collection agency in North Dakota. Also register with this agency as an employer, for state income tax withholding purposes. You can register, on a single form, the North Dakota Application to Register for Income Tax Withholding and Sales and Use Tax Permit, for employer withholding and, if required, a sales and use tax seller's permit. State of North Dakota STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
North Dakota Department of Labor STATE LICENSES. For information on state licensing requirements, contact the North Dakota Department of Commerce, Division of Economic Development and Finance for information, at the address listed above for that agency; or contact North Dakota State University Extension Service to request their Publication EC752, Business Reports, Forms and Licenses Required in the State of North Dakota. Kathleen Tweeten, Community Economic Development Specialist STATE SALES TAX. Obtain your sales and use tax license or permit and information on the North Dakota sales and use tax law, from the State Tax Commissioner, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the State Tax Commissioner to register as an employer, for purposes of North Dakota income tax withholding, 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. Job Service North Dakota REPORTING OF NEWLY HIRED EMPLOYEES. Employers have 20 days (or less, if filing electronically) from the date of hire in which to report newly hired or re-hired employees to the North Dakota Department of Human Services, at: Child Support Enforcement WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: North Dakota Workforce Safety & Insurance STATE OSHA PROGRAM. There is no state OSHA program in North Dakota. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer in North Dakota, contact: U.S. Department of Labor/OSHA For free workplace safety consultations, contact: North Dakota Occupational Safety & Health STATE ANTI-DISCRIMINATION LAWS. Contact the North Dakota Department of Labor, Division of Human Rights, at the address listed above for that agency, for more detailed information on North Dakota civil rights laws that may apply to your business. (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout North Dakota 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 Dakota SBDC (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 Dakota 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 Dakota. Since new sites are appearing frequently, you might also want to search for other North Dakota government Web sites by using one of the popular Internet search engines, such as Google, Excite! or Yahoo. To start your Internet search for North Dakota government information, you may want to begin with the following Internet sites: State of North Dakota home page (and directory with contact information for all state agencies): Office of the State Tax Commissioner (tax forms, employer withholding, sales tax registration): Secretary of State of North Dakota (corporation, LLC, LLP and limited partnership filings): Job Service North Dakota (state unemployment taxes and registration as an employer): North Dakota Division of Economic Development and Finance (new business information and assistance; information on financing): North Dakota Department of Human Services (for reporting of new hires): NDSU Extension Service Web site (to view the Publication EC752 summary of licensing requirements online): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration (SBA) office in North Dakota. You may also wish to contact the North Dakota Department of Commerce, Division of Economic Development and Finance, at the address listed in Section VI(a) for that state agency, or visit their website at the link listed in Section VI(c), for information on commercial financing programs available in the state. The address of the main SBA Office in North Dakota is: U.S. Small Business Administration |
Copyright © 2007 Michael D. Jenkins
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