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STARTING AND OPERATING A BUSINESS IN RHODE ISLAND Copyright © 2007, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Rhode Island, the smallest of the 50 states, has a fairly typical tax and legal structure under which businesses must operate, not significantly unlike that of most other states. Until 2003, Rhode Island had a simple "piggy-back" form of personal income tax. That is, individuals in Rhode Island who filed federal income tax returns did not have to report their income on a state return to Rhode island; instead, they simply paid a tax to Rhode Island that was equal to a specified percentage of the federal income tax, which had been reduced to 25% in the year 2002. However, since 2003, the Rhode Island income tax on individuals is not unlike that of other states, except that the tax rates are equal to 25% of the federal tax rates that were in effect before the 2001 federal tax rate reductions were enacted, using the (old) federal tax brackets. Like most states, Rhode Island imposes an income tax, a franchise tax on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. Taxes in Rhode Island are generally quite high, in relation to per capita incomes of residents. A 2005 study by the Tax Foundation found that Rhode Island, at 11.4% had the fourth-highest ratio of state taxes to per capita income of any state in the nation, while Maine (13%), New York (12%) and Hawaii (11.5%) had the highest ratios. The state has adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Rhode Island in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Legislation in 2002 also made it possible for professional service firms (physicians, dentists, attorneys, etc.) to operate as LLC's or LLP's. Until recently, the state's highly diversified economy was reasonably healthy, in terms of the level of unemployment, average per capita income levels, and other economic measures, but the unemployment rate has been rising in the last year, and particularly in the summer and fall of 2008. For example, in August, 2007, the Rhode Island unemployment rate was 5.1%, but has since increased to 8.5% in August, 2008, considerably above the national unemployment rate of 6.1%. Rhode Island is a hotbed of knowledge industries, with more college students per capita than any other state. The state has access to 86 colleges and universities within 50 miles, the largest concentration of higher education facilities in the U.S., and its workforce has fifty percent more Master's Degrees than the national average. To view the latest federal Bureau of Labor Statistics unemployment rate data for Rhode Island or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Rhode Island 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. However, S corporations, like other corporations, are subject to the state corporate franchise tax on their capital. Rhode Island 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. (b) Sole Proprietorships. In general, sole proprietorships in Rhode Island 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. Most significant license fees are imposed by the state, not the local governments, in Rhode Island. 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 Rhode Island 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 Rhode Island income tax and filing requirements for individuals. Doing business as a sole proprietor in Rhode Island 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 town or city clerk where you do business, as discussed in Section IV(g). (c) Partnerships. Rhode Island'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). As is discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or towns 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 Rhode Island. However, partnerships are required to file an annual tax information return with the state. For more on Rhode Island partnership tax return filing requirements, see Section IV(c). In addition, see Section IV(a) regarding tax requirements for pass-through entities (such as S corporations) that require such entities to withhold Rhode Island income tax if they have nonresident owners. 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 Rhode Island 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 towns 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 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 Rhode Island 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 Rhode Island, and must also pay a registration fee of $100. For more information on limited partnership filing requirements, contact the offices of the Rhode Island 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 Rhode Island. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Rhode Island 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 can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. However, becoming an LLP will not affect the liability of a partner in an LLP for his or her own omissions, negligence, wrongful acts, misconduct or malpractice or that of any person under his or her direct supervision and control, other than in an administrative capacity. To form an LLP in Rhode Island, you must register the partnership and pay a filing fee of $100 per partner, with a maximum of $2,500, to the secretary of state. Foreign LLP's, those created under the laws of another state, must register with the secretary of state and pay the same fees as a domestic LLP. In 2002, the legislature enacted amendments to the LLP law that permit professional service firms to operate in the form of LLP's. Every such professional service LLP is required to maintain at least $50,000 of professional liability insurance coverage per professional employee, with a minimum coverage amount of at least $100,000 and with the maximum required amount equal to $500,000. A partner in a professional service LLP can be held directly liable for his own negligence or malpractice, to the same extent as a shareholder in a professional corporation. Every LLP doing business in Rhode Island, including both domestic and foreign LLP's, must renew its LLP registration annually, and pay the same $100 per partner (maximum of $2,500) fee that applies to an initial registration. For more information on LLP registration 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 Rhode Island, 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 and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Rhode Island, you must file articles of incorporation with the Rhode Island Secretary of State and pay an incorporation filing fee of $70, plus a license fee based on the number of shares of authorized stock of the corporation. If the number of authorized shares is less than 75 million shares, a flat license fee of $160 applies. If 75 million or more shares are authorized, the license fee is 0.2 cents per authorized share. Additional license fees must be paid if the corporation subsequently increases the number of authorized shares by amending its articles. Thus, the minimum fee and license to form a corporation in Rhode Island is at least $230. 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 Rhode Island. This is done by filing an application for a certificate of authority and paying a qualification fee of $150, plus a license fee computed on capital stock at the same rates as for a domestic corporation, but prorated to reflect the ratio of its Rhode Island assets and receipts to total assets and receipts. The minimum license fee is $160, as in the case of a domestic corporation. Thus, the minimum fee and license for a foreign corporation to obtain authority to do business in Rhode Island is at least $310. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Rhode Island, 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 $50 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 Rhode Island 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. Corporations that do business in Rhode Island are also subject to a corporate franchise tax. For more information on the corporation franchise tax, see Section IV(c). For tax forms and more information on corporate income and franchise taxes in Rhode Island, see the contact information for the offices of the Department of Administration, Division of Taxation, 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. Rhode Island recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, they are nevertheless subject to the Rhode Island annual corporate franchise tax and must pay at least the annual minimum tax, which was increased from $250 to $500 as of January 1, 2004. Also, see Section IV(a) regarding the tax requirements for pass-through entities (such as S corporations) that require such entities to withhold Rhode Island income tax if they have nonresident owners. (f) Limited Liability Companies. Rhode Island, 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 Rhode Island may also choose to operate in the form of an LLC. 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 tax purposes, and in most states. See Section IV(c) for a discussion of the income tax treatment of LLC's under Rhode Island tax laws. Also, see Section IV(a) regarding tax requirements for pass-through entities (such as LLC's). Such entities must withhold Rhode Island income tax if they have nonresident owners. To form an LLC under the laws of Rhode Island, one or more persons must file articles of organization with the secretary of state, which must be accompanied by filing fees of $150. The articles must state whether, under the articles or any operating agreement, the LLC is intended to be treated as a partnership, a corporation, or disregarded as an entity separate from its one member, for federal income tax purposes. Rhode Island state law allows formation of one-owner LLC's, which now qualify for treatment as sole proprietorships for federal tax purposes. In addition, in 2002, the legislature enacted amendments to the LLC law that permit professional service firms to operate in the form of LLC's. Like professional LLP's in Rhode Island, professional LLC's must maintain professional liability coverage of at least $50,000 per professional employee, with minimum and maximum required coverage amounts of $100,000 and $500,000 for the firm as a whole. Such insurance coverage may include a deductible of up to $25,000 per professional employee per claim. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Rhode Island, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $150. In addition to initial filing fees, an LLC formed in Rhode Island must subsequently file annual reports and pay an annual report 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. Reports are due each year between September 1 and November 1. 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). III. BUSINESS ACQUISITIONS (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. Rhode Island is one of the business-friendly states that has repealed its bulk sales law, as of July 13, 2001, so you no longer need to be concerned with complying with a bulk sales law in Rhode Island, when acquiring part or all of the assets of an existing business. However, see the following section on tax releases you need to obtain when acquiring a business or a bulk transfer of business assets. (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 Rhode Island, you should obtain a tax release for state unemployment taxes from the Division of Taxation, Employer Tax Section. In any bulk transfer, the transaction is fraudulent and void as against the state, unless the seller, at least five (5) days before the sale or transfer, notifies the Division of Taxation of the proposed sale or transfer and of the price, terms, and conditions of the sale and of the character and location of those assets. Whenever a seller makes a sale or transfer, all sales and use taxes must be paid before initiating the sale; thus, as buyer, you should make sure that the seller has done so. (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. In Rhode Island, you will in most cases automatically succeed to the seller's experience rating as a successor employer. However, if you are already an employer at the time of the acquisition, you may elect for the remainder of that tax year to pay tax on the new employment unit at your existing tax rate, or at the rate applicable to the predecessor employer, which may be a lower rate. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. If you acquire Rhode Island real estate for your business, be sure that you withhold state income tax from the purchase price if the property is acquired from a nonresident of Rhode Island. The withholding tax rate is 9% if the seller is a nonresident corporation, or 6% in the case of nonresident individuals, estates, trusts, or partnerships. A "nonresident corporation" means a corporation that is neither incorporated in the state nor authorized by the secretary of state to do business in Rhode Island. Payment of the withheld tax is due within three banking days after the closing of the transaction. IV. RHODE ISLAND TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Rhode Island, with its highly-skilled and well-educated work force,
is an attractive place to do business, but it is not considered a
low-tax state. Corporations are subject to a relatively high 9%
tax rate on income, and to a franchise tax on capital that is, in
effect, an alternative tax, if the franchise tax is higher than
the income tax liability. S corporations pay the franchise tax.
There is also a fairly high sales tax, at 7%, and business
inventories are generally subject to property taxes in Rhode
Island, except on manufacturers' inventories.
Since 2004, Rhode Island has required all pass-through
entities, including partnerships, limited liability companies
that are not taxed as corporations, and S corporations, to
withhold state income tax on the owners' Rhode Island source
income at the rate of 9% for nonresident corporate owners, or
at the highest individual tax rate, for nonresident individual
owners (partners, members, or S corporation shareholders).
Pass-through entities report information and pay over
withheld tax on Form RI 1096-PT..
No such withholding is required if the owner's share of the
pass-through income from Rhode Island is less than $1,000 for
the annual accounting period or if the owner elects to have the
tax due paid as part of a composite return for nonresident owners,
where such a composite return, Form RI-1040C, is
filed by the pass-through entity. Withholding by a single-member
LLC (SMLLC) is not required, since an SMLLC is a "disregarded
entity" and thus is not considered to be a pass-through entity.
Rhode Island has chosen not to adopt the provisions of
the federal Economic Stimulus Act of 2008 pertaining to the
50% bonus depreciation deduction and the increased dollar
limitation under the Internal Revenue Code Section 179. Under
Rhode Island's tax law, the Section 179 expensing deduction
is limited to $25,000, under both the state personal income
tax and corporate income tax.
For state tax forms and tax information, see the contact
information for the Rhode Island Division of Taxation
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, Rhode Island 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.
To greatly simplify the task of obtaining and paying
for state licenses and permits, Rhode Island's government
agencies have cooperated to form a Business Fast Start
website on the Internet, which will aid you in registering
or applying for various state licenses and permits. To view
the Business Fast Start project's Internet web site, see
the link in Section VI(c).
Businesses may register for sales and use taxes and as
employers on the Business Application and Registration
form, which can be filed online on the Division of Taxation
web site. Small registration fees are required for retail sales
tax permits and for certain types of businesses, such as gas
stations, food or beverage sales (for litter tax registration),
and cigarette sales.
For help with state licensing and business registration
requirements in Rhode Island for specific types of businesses,
such as real estate, travel, auto body, auto salvage, alarm
systems, liquor, and upholstery businesses, see the contact
information for the offices of the Rhode Island Department of
Business Regulation, listed in Section VI(a).
(c) Income and Franchise Taxes.
Rhode Island has both an individual income tax and a
corporate income tax, as well as a franchise tax on
corporations. While the income of pass-through entities
(partnerships, LLC's, and S corporations) is taxed
to their owners, rather than to the legal entities
themselves, such entities may be required to withhold tax
with respect to any nonresident owners, as described in
Section IV(a). In addition, LLC's
and S corporations are both subject to an annual minimum
corporate income tax of $500.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Rhode Island individual income tax was formerly
imposed as a flat percentage of a taxpayer's federal income
tax, at a rate of 26% of the federal tax. However, due to
cuts in federal income tax rates in 2001 and subsequent
years, the Rhode Island tax calculation is considerably
more complex, as it is now based on taxable income times
25% of the federal tax rates that were in effect prior
to the enactment of the federal Economic Growth and Tax
Relief Reconciliation Act of 2001 (with a maximum tax rate
of 9.9%, or 25% of the highest federal tax rate of 39.6%).
An alternative minimum tax is now also imposed (since 2001),
based on 25% of the adjusted tentative federal alternative
minimum tax.
Since 2006, individual Rhode Island taxpayers have been
given the choice of instead paying an alternative flat tax.
The alternative tax (flat tax) is computed at the
following tax rates:
If an individual chooses to pay the alternative flat
tax, no tax credits will be allowed except credits for tax
payments or withholding and the tax credit for taxes paid
to another state.
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 Rhode Island
personal income tax return is Form RI-1040,
which must be filed with the Division of Taxation.
Partnerships, or entities taxable as partnerships, such
as LLC's, are not subject to state income taxation in
Rhode Island, but must file an information return with the
Division of Taxation each year, showing each partner's
share of taxable income, losses, and credits, on Form
RI-1065. 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 LLC's, or
shareholders in S corporations), who have taxable income
from the business, will generally be required to make
advance payments of estimated Rhode Island individual
income taxes, on Form RI-1040ES, if their
net tax liability (not covered by withholding) exceeds $250.
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 underpayment penalties, an individual taxpayer
must pay in at least 80% of the tax liability for the
year as withholding or estimated tax payments or, if less,
pay in an amount equal to 100% of the prior year's tax
liability.
The Rhode Island corporate income tax rate, on corporations
other than S corporations, is imposed at a flat rate of 9% of
taxable income, with a minimum annual tax of $500. The state
corporation income tax return is Form RI-1120C,
which must be filed with the Division of Taxation 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 are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year exceeds $500. Estimated corporation
income tax payments are due in advance, in two installments,
as follows:
The total estimated tax that must be paid in is usually
equal to 80% 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 (computed based on the
prior year's facts at the current year's tax rates).
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
Corporations that do business in Rhode Island are
also subject to a corporate franchise tax. The corporate
franchise tax applies to corporations at the rate of
$2.50 for each $10,000 par value of capital stock, or
fraction of $10,000. No par stock is assumed to have a
value of $100 per share.
The Rhode Island corporation income tax paid is
allowed as a tax credit against the franchise tax
liability. Thus, in effect, the franchise tax generally
is not imposed unless it exceeds the income tax liability,
with the exception of a minimum $500 franchise tax that
applies to all business corporations, including S corporations.
A reduced tax rate applies to certain corporations that did
not do business in Rhode Island during the preceding taxable
year.
S corporations are generally not taxable on their income
by Rhode Island, except to the extent any of the S corporation's
income is taxable for federal income tax purposes. However, S
corporations are subject to the franchise tax on capital stock
and, since their state income tax liability is usually zero, must
pay at least the annual minimum corporate franchise tax of $500.
S corporations file an annual tax return on Form RI-1120S.
TAXATION OF LIMITED LIABILITY COMPANIES
In Rhode Island, a limited liability company (LLC) is
taxed in the same manner as a partnership, thus avoiding
the possible double taxation of income that can occur with
a corporation. Under IRS federal income tax regulations,
effective since 1997, an LLC may now elect to be treated
as a partnership if it has more than one owner, or as a
sole proprietorship if it does not, for federal income
tax purposes. Rhode Island law now recognizes the validity
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, Rhode Island 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 Rhode
Island would treat the LLC as a single-member LLC or as a partnership.
While generally treated as a partnership for Rhode Island
tax purposes, an LLC is nevertheless required to pay the
annual $500 corporation minimum tax. An LLC must file an
annual tax return on Form RI-1120S, which
is also used by S corporations.
(d) Sales and Use Tax.
Rhode Island imposes a general sales tax on retail sales of
tangible personal property and certain types of services at
the statewide rate of 7%. In addition, a 5% state tax (and,
since January 1, 2005, a 1% local tax) applies to hotel and
motel transient accommodations, and a 6% additional tax applies
to car rentals of up to 30 days. There is also a 1% local
meals and beverage tax on sales of food and beverages by
eating or drinking establishments, which went into effect
on August 1, 2003.
Sellers are required to obtain a seller's permit and to
collect and pay over the state sales and use taxes to the
Division of Taxation, Excise Tax Section. There is a $10
seller's permit fee, which must be paid when renewing the
seller's permit each year.
There are numerous 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 Rhode Island. 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 Division of Taxation, Excise Tax Section, by filing
an Business Application and Registration form.
Effective as of January 1, 2007, Rhode Island has adopted
the Streamlined Sales and Use Tax Agreement (SSUTA). Some
twenty states are now members of the SSUTA project.
For more information on Rhode Island sales and use tax
registration and compliance, see contact information for the
offices of the Division of Taxation in Section VI(a).
(e) Real and Personal Property Taxes.
In Rhode Island, 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.
Property taxes are levied by cities and towns, but not by
counties.
Rhode Island localities also impose personal property
taxes on tangible personal property. ("Personal property"
is any kind of property that is not real estate.) However,
certain kinds of business personal property, such as
manufacturing inventories and new manufacturing machinery
or equipment, are exempt from personal property tax in
Rhode Island.
While Rhode Island cities and towns generally tax tangible
personal property, state law prohibits the imposition of any
property taxes on intangible personal property, such as stocks,
bonds, promissory notes, and other such paper assets, except
that the state imposes an intangibles tax on banks and credit
unions.
(f) Other Business Taxes.
Rhode Island 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, including Rhode Island, 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 name. Rhode Island law provides stiff penalties of up to a year in prison or a $500 fine for doing business under a fictitious name without first registering the name with the town or city clerk for the town where the business is carried on. A filing fee of $10 is charged by the town or city clerk. A partnership is not required to register a fictitious name with the town or city clerk if the partnership's name includes the true or real surname of at least one individual who is a partner. The requirement to file with town or city clerks does not apply to corporations or limited partnerships. Instead, they are subject to state requirements that they register any fictitious corporate or limited partnership business name with the secretary of state and pay a $50 fee. A limited liability company (LLC) is also required to file with the secretary of state and pay a $50 fee if it uses a fictitious business name, rather than its true name. 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 Rhode Island imposes a state income tax individuals, you will need to also withhold Rhode Island income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Division of Taxation, which is part of the Department of Administration. Employers must also withhold Temporary Disability Insurance (TDI) from employees' wages, as discussed in Section V(c)(2), and must register for TDI with the Department of Labor and Training. For more information on Rhode Island income tax withholding and registration requirements for employers, see the contact information for the offices of the Division of Taxation, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Rhode Island unemployment tax are required to register with Department of Labor and Training. New employers are required to pay tax at a rate of 2.43% in 2008 on the first $14,000 of wages paid to each employee, which includes a Job Development Assessment tax of 0.21% on the same wage base amount. 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 a complex formula. 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 Rhode Island law, cannot be charged to your employees or withheld from their wages. However, as noted in Section V(c)(2), you must also withhold state Temporary Disability Income tax from employees' wages. For more information on your Rhode Island unemployment tax obligations as an employer, see the contact information for the offices of the Department of Labor and Training and the Division of Taxation, listed in Section VI(a). (c) Workers' Compensation and Other Mandated Employee Insurance Coverage. The state of Rhode Island requires most employers to provide workers' compensation insurance coverage for employees (or self-insure, in some cases), but it also requires employers to withhold temporary disability insurance premiums (or tax) from the wages of employees, to provide a temporary wage replacement for employees who become unable to work. Both of those mandatory insurance programs, one paid by the employer, the other by the employee, are discussed below in this section. (1) Workers' Compensation Coverage. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Rhode Island, effective since January 1, 1999, 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, a partner in a partnership, or a member of an LLC is generally not considered an employee, and certain corporate officers are also exempted, if they file a waiver of coverage with the Division of Workers' Compensation. In addition, certain individuals may be designated as independent contractors and exempted from coverage if they file Form DW 11-1C. Real estate brokers and real estate salespersons are generally exempt from workers' compensation coverage if they are paid on a commission basis and they execute a written contract that states that they are independent contractors and that includes various other required contract provisions. 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: Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. A $250 fine can be imposed for each failure to display the required poster. For more detailed information regarding your obligations as an employer under the Rhode Island workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Division of the Department of Labor and Training, listed in Section VI(a). (2) Temporary Disability Insurance. Rhode Island is one of only a very few states that require disability insurance coverage for all employees. Employers are required to register for Temporary Disability Insurance (TDI) with the Department of Labor and Training and to withhold the tax from the wages of employees. The tax, equal to 1.3% of the first $54,400 of an employee's wages in 2008, is imposed entirely on the employee. To register as an employer for TDI withholding, see the contact information for the Department of Labor and Training 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, because, for example, 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 Rhode Island wage-hour laws, which provide for a state minimum hourly wage that rose to $7.10 an hour on March 1, 2006, significantly higher than the federal minimum. Since the state minimum wage is higher, it will apply for any employee who is covered under both the federal and Rhode Island minimum wage laws. The Rhode Island minimum wage increased again, to $7.40 an hour, on January 1, 2007, where it remains in 2008. As under federal labor laws, Rhode Island requires payment of time-and-a-half for overtime hours worked, in excess of 40 hours in a week. Time-and-a-half is also required for any hours worked on a Sunday or holiday in retail establishments, under the Rhode Island law -- but such hours need not be counted toward the over-40-hours overtime calculation. Non-exempt retail employees who are required to work on Sundays or holidays must be guaranteed at least 4 hours of work on any such day. Employees subject to the minimum wage laws who report for duty at the beginning of a work shift must be paid for no less than three hours at the regularly hourly rate, even if the employer offers no work for him or her to perform, or less than three hours of work is furnished. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees and salespersons are exempted from the Rhode Island wage-hour rules. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Rhode Island Department of Labor and Training. 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 Rhode Island. Rhode Island's child labor laws generally prohibit the hiring of children under age 14 in any business or industrial establishment. Children under age 16 may not be employed in any factory, mechanical, or manufacturing facility, and children of age 14 or 15 may only work between the hours of 6:00 a.m. and 7:00 p.m. (9:00 p.m. during school vacations). In addition, children under age 16 may not be employed in a business or industrial establishment unless the local school committee has issued a child labor work permit. Children under age 16 are not allowed to work more than 40 hours in a week or 8 hours a day. Children aged 16 or 17 may not work, generally, more than 48 hours a week or 9 hours in a day, except during school vacation. Children of ages 16 or 17 who are attending school are generally prohibited from working except between the hours of 6:00 a.m. and 11:30 p.m. (1:30 a.m., if not on a regularly scheduled school day). (e) State Occupational Safety and Health Laws. Employers in Rhode Island must comply with state and federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. The state does not maintain an OSHA-approved safety plan, and thus relies on federal OSHA to enforce job safety laws in Rhode Island, as do more than half of the states. 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 Rhode Island Department of Health, Division of Occupational Health and Radiation Control and they detect violations, they will not cite you 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 Providence offices of the U.S. Department of Labor, OSHA, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Rhode Island labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. State law in Rhode Island requires employers to pay wages each week, unless compensation is fixed at a biweekly, semi-monthly, monthly, or yearly rate. When an employee's employment is terminated, final wages are usually due on the next regular payday. However, if the termination is the result of the employer being liquidated, merged, sold, or moved out of state, wages are due within 24 hours of termination. If an employee has been employed for at least one year, he or she must also be paid for any accrued vacation when employment terminates. (2) Right-to-work laws. Almost 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. Rhode Island does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. To the contrary, state law in Rhode Island prohibits employment discrimination against a person because he or she is a member of a labor union. (3) State anti-discrimination laws. In addition to compliance with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Rhode Island, and display a poster informing employees of their rights. The Rhode Island Fair Employment Practices Act makes it illegal to discriminate against an employee or potential employee because of their race, color, sex (including pregnancy status and sexual harassment), religion, ancestral origin, disability, age (40+), sexual orientation, or gender identity/expression. The law covers such issues as hiring, promotion, salary, terms and conditions, termination and harassment. Companies with four (4) or more employees are covered by this act. The law also prohibits retaliation against people who bring charges, assist in investigations or oppose unlawful employment practices. For more information, contact the Rhode Island Commission for Human Rights, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Rhode Island State New Hire Reporting Directory for Rhode Island employers) within 14 days after the date of hire. See the contact information for the State Directory of New Hires in Section VI(a). (5) Family leave laws. Rhode Island has a family and parental leave law that is very similar to the federal Family and Medical Leave Act (FMLA), except that it applies to any employer with 50 or more employees. The Rhode Island law has a number of other major or minor differences from the FMLA, including the following:
Like the FMLA, the state law allows unpaid family or parental leave to be taken by an eligible employee to care for a sick family member or parent suffering from a serious illness, for birth of a child of an employee, or in connection with the placement of a child under age 16 with an employee for adoption. Rhode Island law also requires that leave time be granted by an employer for parental involvement in a child's school activities. An employee who has been employed by the same employer for twelve (12) consecutive months is entitled to a total of ten (10) hours of leave during any twelve (12) month period to attend school conferences or other school-related activities for a child of whom the employee is the parent, foster parent or guardian. The employee must give twenty-four (24) hours prior notice of the leave and make a reasonable effort to schedule the leave so as not to unduly disrupt the operations of the employer. Employers subject to the Rhode Island Family and Medical Leave Act are required to display a poster in the workplace, summarizing the Act's provisions. (6) Lie Detector Tests and Genetic Testing Prohibited. Under Rhode Island law, an employer may not require or demand, as a condition of employment, prospective employment, or continued employment, that an individual submit to or take a lie detector or similar test. Unlike the federal law, which exempts certain kinds of private businesses from the prohibition against polygraph testing, the Rhode Island law makes no such exceptions. State law also prohibits employers from requiring any employee or applicant for employment to undergo genetic testing. (7) Rhode Island smoke-free workplace rules. State law prohibits smoking in most enclosed workplaces in Rhode Island. The law applies to even the smallest employers, with one or more employees. Some places are exempted, such as outdoor areas of employment, smoking bars, retail tobacco stores, and designated hotel or motel rooms, provided that no more than 50% of the rooms in a hotel or motel may be designated as smoking rooms. Businesses are required to post a notice in places where smoking is prohibited, containing the words, "IT IS ILLEGAL TO SMOKE IN THIS ESTABLISHMENT." Posters may be obtained from the Rhode Island Department of Health's Tobacco Control Program. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Rhode Island, 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, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. See the Internet web links to the First Stop Forms web page and to the Business Fast Start website in Section VI(c). You can receive help with obtaining permits for your business from the state by contacting the Rhode Island Economic Development Corporation at the following address: To obtain permit assistance and information on starting or relocating your business in Rhode Island, contact: Rhode Island Economic Development Corporation Addresses and other contact information for other key state and federal government agencies in Rhode Island, mentioned in preceding sections of this book, are listed below for your convenience. BUSINESS STARTUP INFORMATION. Another key agency that can provide helpful information on getting your business up and running in Rhode Island is the Business Information Center, operated by the Rhode Island Secretary of State's office: Business Information Center 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 Rhode Island Division of Taxation, which is the main tax collection agency in Rhode Island. Also register with this agency as an employer, for state income tax withholding purposes. Rhode Island Division of Taxation STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Rhode Island Department of Labor and Training STATE LICENSES. The following agency is a major Rhode Island licensing agency. Register with this state agency for real estate, travel, auto body, auto salvage, liquor and upholstery businesses. Department of Business Regulation STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Rhode Island sales and use tax law, from the Division of Taxation, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the Division of Taxation to register as an employer, for purposes of Rhode Island income tax withholding, at the address listed above for that state agency. STATE UNEMPLOYMENT TAX. Contact the Department of Labor and Training, Unemployment Insurance Division, at the address shown for that agency above, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Or, contact the Division of Taxation (regarding taxes only): Division of Taxation NEW HIRE REPORTING. Rhode Island employers must report all newly hired or rehired employees to the following agency, by mail, fax, or electronically (and no, the Nebraska address below is not a misprint): Rhode Island State New Hire Reporting Directory WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Department of Labor and Training STATE OSHA PROGRAM. There is no state OSHA program in Rhode Island. 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 Rhode Island, contact: U.S. Department of Labor/OSHA For state OSHA consultation services, contact: OSH Consultation Service STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Rhode Island civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Rhode Island Commission for Human Rights (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Rhode Island 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. Rhode Island 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 Rhode Island 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 Rhode Island. Since new sites are appearing frequently, you might also want to search for other Rhode Island government Web sites by using one of the popular Internet search engines, such as Google, MSN, or Yahoo. To start your Internet search for Rhode Island government information, you may want to begin with the following Internet sites: State of Rhode Island home page: Rhode Island Secretary of State (filings for limited partnerships, LLP's, LLC's and corporations): First Stop Business Information Center (business forms and other startup assistance, from the Secretary of State): Business Fast Start project (a collaboration of state agencies to provide for a single point of entry for new business owners to obtain, submit and pay for state license and permit applications): Department of Labor and Training (state unemployment tax, workers' compensation, and Temporary Disability Insurance registration): Division of Taxation (tax forms and information): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Rhode Island, or contact the Rhode Island Economic Development Corporation. This agency offers several programs to help make financing available to existing and start-up businesses. For further details and information about state lending programs, contact the Economic Development Corporation at: Rhode Island Economic Development Corporation The address of the SBA Office in Rhode Island is: U.S. Small Business Administration |
Copyright © 2007 Michael D. Jenkins
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