how should i classify my llc [Guide]


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Last updated : Aug 7, 2022
Written by : Natividad Carlozzi
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how should i classify my llc


Comment by Sanora Strizich

as of 2021 there are 31.7 million business owners in the united states many business owners are setting up llc's one out of every six taxpayers that comes to my office owns an llc i own six llc's and i've set up over 5 000 llcs for my clients l to the l to the c i love saying llc because it reminds me of ll cool j llc's are the most popular business vehicles that business owners set up why is it that most business owners who have llc's aren't sure if they should be in llc's my name is carlton dennis and in today's video we are going to go over what you need to consider before setting up an llc llc owners make a lot of mistakes i'm sorry and in today's video i need to point out some of the mistakes that you need to be conscientious of before establishing your llc let's dive in mistake number one is not knowing the type of income you're receiving prior to setting up your llc this is really important and reason why is because there are three different income types you could be receiving and it could determine whether or not you need an llc versus an s corp or a c corporation the three different income types that you need to be familiar with are number one ordinary income ordinary income is everyday income that you work for and is typically in the form of w2 wages or 1099 compensation the next form of income is passive income passive income is income you technically do not have to work for typically you're familiar with passive income from investment properties or interest that you earn off of the money that you have in your bank account the third type of income is portfolio income portfolio income is typically income that you receive when you decide to sell capital assets or if you have capital gains tax from the sell of a rental property these three types of income are important for us to know because it can help us decide whether or not it makes sense for us to have an llc so let's talk about it number one passive income if we have passive income what we have to understand is that passive income is not subject to social security tax or medicare tax that ordinary income is subject to so when you think about it it may not make sense for you to worry about whether or not you have to eventually transition your llc to an s corporation if you have rental real estate if your income is passive you don't have to worry about self-employment tax so typically a lot of real estate investors will establish llc's for their real estate holdings so if you ever had the question in your head why do people set up llc's as opposed to c corps or s corporations for their real estate a big deciding factor around this is because real estate investors are not subject to the social security and medicare tax that ordinary income earners are subject to this leads me to ordinary income ordinary income is the income you're familiar with when you're working a job where you are putting in labor anytime you're putting in labor you're going to have to pay into social security and you're going to have to pay into medicare taxes and if you decided to become a business owner that means you pay into self-employment tax it's been talked about in all of my youtube videos if you've seen them now one thing that you have to understand about ordinary income is that ordinary income you will pay 15.3 self-employment tax which is your social security and medicare but then you will also pay your federal taxes and your state taxes so knowing that ordinary income is subject to self-employment tax federal tax and state tax we have to define what type of business owners need to know that their business is actually ordinary income instead of passive business let's talk about that i have clients all the time that'll get on the phone with me and tell me carlton i have a passive business i started amazon automation i'm doing amazon fba i'm selling products on etsy i have my online shop any of these clients that i talk to that have these businesses that are very automated had to work to get to a place where their businesses are automated they sat on the computer they figured out how to put up ads build their website hire the contractors and someone else is doing the fulfillment and dropping off the orders to the house that is a business that requires work and if labor is involved we are subject to social security and medicare taxes federal and state taxes so i just wanted to make sure that when we go into setting up a llc that we also understand which type of businesses are ordinary income businesses and truly understanding what would be considered a passive business last but not least is portfolio income i don't really get too much into the portfolio income unless i'm dealing with my real estate investors which i primarily focus on if you happen to have real estate income and you decide to sell an investment property you're dealing with capital gains it could be short or long-term capital gains depending on how long you held on to that asset but if you're aware of capital gain income you might realize that this is actually categorized as portfolio income to your tax account so understanding these three types of income can let us know whether or not you should have an llc that's going to remain as an llc or if you have an llc that will eventually be switched to an s corporation or another desired entity structure mistake number two with llcs is not establishing your llc prior to knowing that you wish to have a real estate acquisition it comes up pretty often that i get on the phone with a client that told me that they just bought an investment property and now they're trying to decide whether or not it makes sense for them to have an llc and i sometimes wish that they would just have a conversation with me prior to them buying the rental property because then i might have advised them to establish the llc prior to buying the rental property so that they can buy the property in the name of the llc that they establish for themselves this is a way that we can completely avoid having your name ever online at the accounting assessor's office saying that you're on title for owning the property but then we get to a place where you want to have that asset protection because you find out that someone could slip and fall and hurt themselves inside of your property so you eventually want to have an llc for liability protection but the property is already in your name so now we have to decide does it make sense to set up an llc and do a quick claim deed and re-title your property in the name of the llc well this is where we can run into some issues at least i've had clients run into issues one of the issues that they run into is this whole do on sale clause where now there's a stipulation in their mortgage agreement that says that anytime a property is being transferred or sold that the mortgage is now due so this is where we have to be extremely careful and mindful prior to establishing llc's into investing in real estate we have to speak with the tax pro we have to speak with our mortgage company we have to determine if we can purchase a rental property in the name of an llc and if you're setting up


Thanks for your comment Sanora Strizich, have a nice day.
- Natividad Carlozzi, Staff Member


Comment by hettanh

four types of LLC tax classification options to choose from from business verse family comm if you're an entrepreneur who needs to know the first steps to starting your own business for the first time you need to watch this video here you'll learn three things first you'll learn about the five different types of LLC tax classification for businesses second you'll learn the unique advantages of filing as an S corporation and finally you'll learn how to make the best decision possible to start a small business LLC with the appropriate corporate structure a limited liability company LLC is one of the most common types of business entities around despite their popularity as a business structure limited liability companies do not have their own tax classification depending on how many members are in the LLC your business can be taxed in different ways as a business owner this could drastically change how much taxable income you have at the end of the year in this video we'll cover the different LLC tax classification options you can choose from single member LLC tax classification for most single owner businesses a single member LLC is taxed as the sole proprietor business the LLC is a pass-through entity so the income will transfer over to your personal income return traditionally this classification is the default when you form an LLC as a single member if you would like to be taxed as a sole proprietorship this classification could work for you it is a common first step for businesses that are changing from a DBA to LLC multi-member LLC tax options secondly if you form an LLC with multiple members the default classification is a partnership under a multi-member LLC formation all the members are taxed like partners in a partnership entity in this situation you might have to file an additional document form 1065 partnership return of income to the IRS since the LLC doesn't pay taxes the net income or losses are transferred to the members you should have your accountant ensure that all income in a partnership taxation is calculated properly using this LLC's classification electing to tax an LLC as an S corporation next you can elect to have your LLC tax classification treated as an S corporation typically this works for single member or multi-member LLC businesses without all the additional work of maintaining S corporation status you have sufficient flexibility to distribute profits or losses to owners but you would probably have to pay yourself a salary at the advisement of a tax professional or accountant if you would like to take the best of both worlds between an LLC versus an S corporation this LLC tax classification could be perfect for you violin LLC taxes like a corporation additionally you can elect to tax LLC entities like a seat corporation using the form 8832 an LLC can be treated as a seat corporation for tax classification purposes this is less common since the LLC will no longer be treated at the pass-through entity it will be regarded as a separate entity which could result in double taxation you could end up paying taxes at the corporate level and then again on the corporate dividend although it's a less popular option you can still consider this LLC tax classification with your financial advisors if needed if you decide to form an LLC you have access to many different types of tax classifications this is one of the major benefits of an LLC structure as a single member LLC you can be taxed as a sole proprietor or corporation in a multi-member limited liability company you can classify the company as a partnership or corporation for tax purposes clearly all of these types of classifications can have various impacts on your tax obligations ensure that you have proper tax planning strategies in place when electing your LLC tax classification which tax classification will you choose for your LLC let us know in the comments below if you found this guide to LLC tax classifications helpful like this video and subscribe to Business first family below then visit business first family com for all your entrepreneurial need you


Thanks hettanh your participation is very much appreciated
- Natividad Carlozzi


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