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The Limited Liability Company (“LLC”) is a term used loosely in the tax universe. Many do not understand this entity, the intended purpose and tax implications. This article provides an overview of the basics for tax purposes and is not legal advice. Advice from a qualified attorney should be sought any time rights and obligations are being considered. This topic can be quite complex but the objective is to provide an overview.
Formation:
The LLC entity is a state law creation, not federal law. California LLC law came into place in the mid-1990s and revised in 2014. The purpose of the entity is to provide the owners, referred to as Members, enhanced legal protection compared to an individual or partner in a general partnership. Again, consult a qualified attorney for information on rights and obligations of LLC members. A wonderful use of the LLC entity is for holding ownership of rental real estate.
Fees:
LLCs formed in California pay a fee, not a tax, based on Gross Receipts, not on taxable income. The fee is based on a graduating scale of receipts. The fee begins at $800 and caps at $12,590. A business choosing the LLC entity could pay substantially higher fees when compared to choosing a corporate entity.
Taxation:
LLCs are considered “Disregarded Entities” for federal tax purposes. This means the managing member(s) of the LLC must choose how they will be taxed for federal purposes. The entity will follow the tax rules for the tax entity chosen.
If there is only one member, the entity is call a Single Member LLC and can choose from filing Schedule C (Profit or Loss From Business), Schedule E (Supplemental Income and Loss (rentals etc.)), or a corporate entity (addressed below). When Schedule C or E are chosen there is NO separate federal return filed in addition to the 1040. California Form 568 Limited Liability Company Return of Income is filed annually for the LLC when the 540 is filed.
LLCs with multiple members can choose from a partnership or corporate tax entity. The most common choice is partnership due to the legal benefits (see a qualified attorney). Some managing members choose a corporate entity which is generally not recommended by experienced accountants such as myself. The reason for not choosing a corporate entity is redundancy. Most choose the LLC entity for liability protection and these benefits are inherent in a properly operated corporation.
Summary:
I have assisted in evaluating clients choose the proper entity based on their tax objectives. I also work closely with the client’s legal counsel to ensure they fully understand their choices and the requirements associated with their decision. I can help! Please call me at (714) 998-9244.