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Limited Liability Company CPA discusses IRS Taxation Options | LLC Tax

Limited Liability Company CPA discusses LLC tax options

Gary Bode, CPA: There’s a reason why LLCs are so popular. For a free initial phone consult, please call 399-2705.

Limited Liability Company CPAs see the LLC touted as the business entity of choice. But the choice of business for entity depends on multiple factors. Note that LLC is a unique type of business organization allowed under state law. First used as holding companies for real estate, they’ve become popular for the limited liability they can offer each Member. If the LLC is sued, each Member is only liable for what they’ve put into the LLC. But a good lawyer can still attach to the Member’s personal assets under some conditions which aren’t addressed here. I’ll deal with IRS taxation issues which must be considered with any business startup.

“The IRS allows a Limited Liability Company to choose how it wants to be taxed.”
– Gary Bode, LLC CPA

So, how can my Limited Liability Company be taxed?

Single Member Limited Liability Company – SMLLC

This is the default IRS classification for a LLC with only one Member. However it can be taxed as a C Corporation or S Corporation as well. Your SMLLC is a sole proprietorship, but the LLC adds a layer of legal protection should the company be sued. Your Limited Liability Company’s CPA files Schedule C, Profit or Loss for Business, along with your personal Form 1040. You pay income and self-employment taxes on the profit from Schedule C. See the S Corporation section below for a nice loophole around this self-employment tax.

Partnership LLCs

Partnership is the default IRS classification for LLCs with two or more members. This is a very flexible entity. Profits, losses and equity can be re-allocated at will. This makes attracting investors and accommodating the changing needs of current Members easier. The Limited Liability Company’s CPA files Form 1065, U.S. Return of Partnership Income. The LLC incurs no tax per se. But profits, losses and equity flow into each Member’s Schedule K-1. And that information then flows into each Member’s Form 1040. Partners can’t be paid as employees, so profits and distributions are subject to self-employment tax.

C Corporation

Your Limited Liability Company’s CPA files IRS tax Form 8832, Entity Classification Election, to request being taxed as a C Corporation. This action makes sense in two cases 1) as the initial step to becoming an S Corporation and 2) if the LLC might go public in the future. C Corporations are double taxed.

S Corporation

Here your LLC’s CPA files Form 2553, Election by a Small Business Corporation, after approval of Form 8832 mentioned above, to turn the LLC from a C Corporation into an S Corporation. I know it seems convoluted. Distributions from S Corporations are not subject to self-employment tax. Which can be a nice cash flow advantage during LLC startup. S Corporations aren’t double taxed either. But they lack the flexibility of a Partnership for attracting new shareholders or adapting to current shareholder’s changing needs.

We’re a Wilmington NC Limited Liability Company CPA firm. Our virtual office allows us to provide excellent service to long distance clients. For a free initial phone consult please call (910) 399-2705

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