I own an LLC with a partner. We are growing quickly so virtually all of the profits this year have remained in our LLC's bank account. We haven't paid ourselves much of anything.
I know LLC taxes are paid on personal income taxes, but I also know that you keep business and personal funds separate.
My question is, will we have to pay taxes on these profits, as personal income? We haven't techincally received the profits, but it was still profit.
The money stays in the business bank account however so that we have enough capital to grow the business.
You Wrote: 'Yes, a multiple member LLC is taxed as a partnership unless it elects to be taxed as an S or C corp.'
Are you sure that 'no matter' what type of entity you operate, you'll still have to pay taxes?
Thanks
K.
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Yes, a multiple member LLC is taxed as a partnership unless it elects to be taxed as an S or C corp. The bottom line is profits are taxable income no matter what type of entity you operate. It is just a matter of who pays the taxes.
I am aware that under single owner LLC even if we leave profits in the company's bank account at the end of the year -- for instance, to cover future expenses or expand the business -- you must pay taxes on that money. Does this also apply under multiple-owner? How does that makes sense with the funds that are in the business account (not dispersed as income) are liable for income tax?
Yes, even though the funds stayed in the company, it is considered your income based on your partner agreement or articles (what percentages are to go to each of you). You must pay taxes on your income - the IRS looks at it as you took the money then put it back into the company.
Now, I an not an accountant or lawyer - but, you might think of a way in the future to take those funds and put them back into the company but do so that it creates a business expense. Thus, you receive the income but have legitamate expenses to off set some of the tax liability. Just keep in legal.
FYI to all, if you elect to be taxed as an S-Corp you will have to pay payroll taxes equal to self-employment taxes and your state will probably require you to pay unemployment insurance on top of that. You may be able to pull a portion of income out of the entity as passive income but certainly not all.
Please keep in mind that replies in this thread, and all threads in the Community, should not serve as a substitute for legal advice.
Refer to IRS guidance for the Tax Requirements of S-Corporations.
Thanks for the clarification, now here is an obvious question: Do you recommend using a cheaper service like legalzoom, etc vs. going to a lawyer to form an LLC. I hate getting the 'it depends' answer. Can someone just be straight with me for once!?
I mean as far as their own PERSONAL experience as to using a company like legal zoom. Times are slow, so ofcourse I'd like to get the most for my money - what would be the drawback of using a company like Legal Zoom as opposed to an attorney..again don't say 'it depends' - I have a small company w/ no complex issues, that I know of.
For a single member LLC, just do it yourself. It's a simple process and your state website should have all the information you need. They usually also have phone number to help you find the forms you need to submit.
For multiple member LLCs, I suggest you go through a lawyer since partnerships makes things a lot more complicated.
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