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- Earl Jaurigui, Staff Member
so what are the tax benefits of the llc how is it taxed and how does an llc help save you money in taxes now the llc started in the united states in 1977 in wyoming the challenge was that the irs was not clear on how they were going to tax them so the irs taxed them as corporations in fact i wrote one of the first books on llc's in 1995 then in the same year the irs and the treasury department announced in notice 95-14 to simplify the tax station and let the taxpayer choose whether it is taxed as a sole proprietorship partnership or corporation many call this the check the box regulations because on the form 8832 you can check a box to choose how your llc is taxed and the irs made these changes final on january 1st 1997. hi i'm the business guy and we're going to talk about how the llc is taxed i've been in the company formation field since 1991. our company started in 1906 we have attorneys on our staff and employees nationwide and if you're watching this on youtube please click the like button below and any of your comments and you can also click the subscribe button so that when more videos come out like this you'll get notified okay now there are generally four ways that an llc is taxed the first way that an llc is taxed is as a sole proprietorship now with an llc owners are called members so when we form an llc for a client and that client is the only member by default the irs taxes that company as a sole proprietorship another term for this type of taxation is a disregarded entity and that's because there's no tax at the company level the llc typically uses your own social security number as its tax id number the income and deductions are reported on your personal tax returns as if the company didn't exist so the first way an llc is taxed is as a sole proprietorship also called a disregarded entity by default if it only has one member the second way an llc is taxed is as a partnership when we form an llc for a client and that llc has two or more members by default the irs treats that llc as a partnership for taxation purposes that means the company does not pay its own income taxes instead the income and deductions flow through the company to the tax returns of the members then the members pay the taxes on their own personal tax returns typically in proportion to their percentage of membership interest so let's say john owns 70 percent of the company and sally owns 30 percent of the company after all deductions the llc makes one hundred thousand dollars for the year so john will pay taxes on seventy thousand dollars of that income and sally pays taxes on thirty thousand dollars of that income and with a sole proprietorship or partnership the members pay the taxes whether the money is moved from the company's bank account to their personal bank accounts or not so in the above example if john and sally leave the entire hundred thousand dollar profit in the llc's bank account or they transfer some or all of the hundred thousand dollars from the llc's bank account to john and sally's personal bank accounts the tax that john and sally owe to the irs is exactly the same and that is because there is no tax at the company level on a sole proprietorship or partnership all taxes are paid by the members of the llc now this part is very important for you to understand keep in mind the legal protection that the llc gives and how it is taxed is in two separate buckets so say somebody sues your business not you personally but your llc llc statutes can protect your personal assets from that business lawsuit so structured properly the llc can protect you from somebody seizing your bank account your house your cars and it can provide this legal protection regardless of how your llc is taxed on the other hand a regular sole proprietorship or partnership that you own does not protect your personal assets from business lawsuits but an llc can still protect you regardless of how it's taxed so an llc taxed as a sole proprietorship or partnership can protect you just as much as an llc tax in any other fashion so how it is taxed does not change how it protects you so a business that is a sole proprietorship or partnership is very different than the protection that an llc gives you that is taxed as a sole proprietorship or partnership so by default if an llc has one member it is taxed as a sole proprietorship if it has two members or more it is taxed as a partnership by default and when we see by default that means for a usllc you do not need to file the 8832 form for your llc in order to be taxed in one of those fashions now cpas do recommend that you fill out an 8832 form for an offshore llc to be taxed as a sole proprietorship or partnership to clarify how you want the irs to treat your offshore llc now you would likely want your llc to be taxed in one of these ways when it owns real estate there are a lot of tax deductions you can get with real estate so you would likely want to take advantage of those tax deductions to reduce your personal income taxes a third option you can choose is to have your llc taxed as a c corporation and you do this by filling out an 8832 form and checking the box electing corporation taxation so with this type of taxation your llc is taxed as a c corporation it pays taxes on the profit the company earns before the end of its tax year so the money that the llc pays you as a salary is taxable to you personally but tax deductible to your llc then the irs taxes the profit remaining in the llc by the end of its tax year at the then current corporate income tax rates now tax as a corporation is the least popular taxation method for llcs now you might choose this method of taxation if you want to raise money by taking your company public or let's say you want to choose a different month in december for your tax year end or your only employees are immediate family members and you have substantial medical expenses to deduct that the company pays as an employee benefit now it's not a good choice if you operate a personal services corporation because if you accumulate money in the company it could trigger a 20 accumulated earnings tax the fourth way that you can choose to have your llc taxed is as an s corporation to elect the s corporation you first file the 8832 form with the irs and choose corporation taxation you then file the 2553 forum and elect s-corporation taxation you can pay a small but reasonable salary from an llc tax as an s corporation then you pay the remainder of the money as a distribution to shareholders which is not subject to social security currently at 12.4 percent and medicare tax currently at 2.9 percent so you can save a combined 15.3 percent also called the self-employment tax on a large chunk of your income now you don't need to do this when your llc owns rental income property since you do not generally pay social security or medicare on rental income anyway so no need to choose s corporation status for rental property plus section 469 c of the tax code says if more than 25 percent of an s corporation's income is considered passive such as rental income the irs can tax that income at c corporation tax
Thanks Riley your participation is very much appreciated
- Earl Jaurigui
About the author
I've studied algebraic geometry at University at Albany, State University of New York in Albany and I am an expert in social phenomenon. I usually feel high. My previous job was artists agent (manager) I held this position for 10 years, I love talking about coffee roasting and darts. Huge fan of Amanda Bynes I practice wrestling: greco-roman and collect banknotes.
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