Question

Three individuals recently created a LLC, with equal interest. One will be working in the business as manager and will receive a salary of $60,000; all will have substantial income from other sources. The LLC expects to be profitable and will earn approximately $30,000 of ordinary income and $30,000 or long-term capital gain. What tax issues should the members consider regarding the LLC's initial year of operations?

Answer 1

A limited liability company (LLC) is not a separate tax entity like a corporation; instead, it is like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners (called members), who report this information on their personal tax returns. Thus all the income from this LLC will be reported in the personal tax returns of the these three individuals (with Schedule E attached). A member of LLC has to pay taxes on the profit of business, even if that profit is not paid out to the individual.

The first individual, who will be working as the manager will have to show income from salary $ 60,000 and $10,000 as income from self employment and $ 10,000 as capital gains. The other two partners will report in their income tax returns $10,000 as income from self employment and $ 10,000 as capital gains only.

There is an option with the three individuals to decide to whether tax the LLC as a corporation also. In this case, the LLC will pay corporation tax and the individuals will have to pay separate perosnal income tax also. This leads to double taxation. in case of individuals who are at the high end of tax tables, then option is vaible as the income tax rate is higher than the corporation tax rate.