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The BizFilings blog covering business tips and trends.

Now that you have an LLC, it is Time to make Tax Decisions

Published on Mar 23, 2012


Read 'Now that you have an LLC, it is Time to make Tax Decisions' at 'Time to Start Up,' the small business blog by BizFilings.
By Eva Rosenberg, EA Living in California, it took me a really long time to gain any understanding of LLCs. I just couldn’t figure out why anyone would be foolish enough to set up one of those entities – because California makes them excessively expensive. In addition to the annual $800 minimum fee for just LLCs, corporations and limited partnerships, California also tacks on a Gross Receipts tax. That means, your LLC pays an extra tax on its sales or receipts BEFORE deducting any expenses. So you could have a million-dollar loss, and still pay an extra $6,000 in state taxes because your LLC had gross receipts of $1,000,000 - $4,999,999[1]. Considering this, you can understand my resistance to California LLCs. However, traveling the country, teaching tax professionals, I learned more about how useful they could be in other states…and even a few reasons they might work in California. To learn more about tax considerations in your own state, visit BizFilings resource on Understanding State Corporate Taxes and state tax guides. In order to use an LLC, you need to make some choices.  

An LLC is filed as?

Having set up your LLC with BizFilings.com is just the beginning of your adventure in business ownership. Now, you have to make a decision on how to report the earnings and activities of that LLC for tax purposes. It’s important to make this decision early, because you’ll need the information for bank signature cards and before you set up payrolls, sales tax arrangements, and other licensing.  

Ignore the Decision – Your Default is…

In its basic form, if you don’t make any tax choices, when you set up an LLC you are considered a disregarded entity by IRS. What does that mean? If one person owns the LLC, you will report all the income and expenses on your own Schedule C - Profit or Loss From Business or Schedule F – Farm Income. Or if the LLC owns rental real estate, report all the activity on page 1 of the Schedule E of your personal tax return. When two or more people own the LLC, the default entity is a partnership, which files Form 1065.  

Those Who Are Clued In

While the disregarded entity may be the easiest option, smart business owners do some planning. You can take advantage of a variety of tax benefits, succession planning, or perhaps lay the groundwork to go public. To make the decision, please talk to your advisory team – your attorney and a smart, experienced tax professional. This is critical if you want to pay the least amount of taxes – and get the most benefits, legally. An LLC doesn’t have to be a humble disregarded entity. It could be powerful and exciting. You can decide to file as an S corporation or C corporation. To tell IRS you want to file as a corporation, use Form  8832. To tell IRS you want to be an S corporation, use Form 2553. Typically, you need to submit these forms by the 15th day of the 3rd month after you set up the LLC. If you haven’t done that yet, don’t worry. As long as you file your elections with IRS by the time you file your first tax return, IRS will accept your entity selection. Once you make your choices, the decision is not set in stone. You can change your entity choice once every 5 years. And if you never made a choice, but have been floating along, filing as a disregarded entity, you can make your first election this year.  

More Resources

Before you leave, please read a little more. BizFilings.com has some excellent resources to help you learn more about business structures. Here is a comparison chart of the tax considerations for the various structures. Take a half hour to view the webinar about business structures. And tune in to the next BizFilings FaceBook Roundtable. Incidentally, we’ll be talking more about which IS the right structure for your business next time. Come back in two weeks for the next set of tips. -- Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered for free. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches tax courses at IRSExams.com and CPELINK. Do you have a passion for taxes? TaxMama is conducting a search for the Ultimate Tax Nerd of 2012. Enter to win prizes, including a Kindle Fire, tax software and other swag.
[1]You will find the table of fees on page 2 of the general LLC information - https://www.ftb.ca.gov/forms/misc/3556.pdf