What about an LLC and Taxes?

Many small business owners form LLCs to avoid the “double taxation” of a corporation. In a C Corporation, the IRS taxes profits at the corporate level and dividends at the shareholder level. In contrast, LLC owners can choose whether they would like the IRS to tax their business as a sole proprietorship, partnership, C Corporation, or S Corporation.

LLC Tax Benfits

The most remarkable benefit of an LLC is based on the flexibility by which it can be taxed. Members of an LLC can use the “check box” method and elect to have their LLC taxed as either a C corporation or as an S corporation by timely filing the 2553 form. By default an LLC is taxed as a sole proprietorship if it is a single-owner LLC, or as partnership if it has two or more owners. All options should be examined to establish which scheme provides the greatest tax relief. Regardless of the method of taxation, the legal liability protection remains in place.

The IRS has created the “check box” form, or form 8832 for C corporation or form 2553 for S corporation, to deal with how an LLC is to be treated for taxation purposes.  This form simplifies the process of allowing an LLC to elect how they would like to be taxed.  LLCs with more than one member are usually classified as a partnership, but can elect to be treated as C corporation or S corporation.  However, electing to do so would forfeit the “pass-through” tax benefits.  Choosing to have your LLC taxed as a partnership would subject it only to a single Federal Income Tax at the partner level.  Each member reports his share in company’s gains, losses, deductions, and credits on his personal tax return.  The restrictions on the equity and capital structure of an S corporation can limit the flexibility in planning for your company’s growth.  For example, an S corporation may not have more than 75 shareholders, and those shareholders can only be individuals and estates.  In addition, an S corporation can only issue one kind of stock.  This limits one of the LLC’s flexibility in ownership levels.

Members may receive shares of partnership property without recognizing a gain or sustaining a loss.  The allotment is a non-taxable withdrawal of the member’s investment up to the level of his interest in the membership.  However, a member does recognize a gain on a current distribution if it exceeds his level of interest in the LLC.  These gains and losses are recognized as capital gains and losses for tax purposes.

When taxed as a partnership or sole proprietorship, an LLC is not a separate tax-paying entity.  Each member is individually responsible for the taxes on his share of losses, profits, and deductions.  However, a C corporation is a separate body for taxation and is required to pay its own taxes.  S corporations are taxed similarly to partnerships, as the taxes pass down to the shareholders.  Every shareholder reports his share of the income on his tax forms, but that income can be re-typified.  For example, if the S corporation earns profits that would be taxed as normal income earned by an individual, the corporation can pay the earnings as a “distribution to shareholders.”

Change in ownership of the shares does not terminate a corporation for taxes.  An LLC ceases for Federal Income Tax law when more than fifty-percent of the interest in profits are sold within one year.  Simply, though still in existence by law, the LLC terminates and restarts to create a new body.

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LLC Taxes & Real Estate Holdings

If you are a real estate investor, you can protect your personal assets by forming a Limited Liability Company.  Recently, real estate investors are beginning LLCs.  Like other LLCs the benefits of a real estate LLC are its greatest selling points, most specifically its legal and tax benefits.

The greatest legal benefit of an LLC is that these kinds of companies provide all the liability protection of a corporation, but with fewer restrictions.  For example, an LLC does not require regular stockholders meetings, a board of directors, regular board meetings, or records of all these meetings and bodies.  The legal liability protection of an LLC is extremely valuable in other ways, as well.  It can protect from “worst case scenarios” such as accidents on an investor’s property.  With an LLC as the property owner this worst case is liquidation of the LLC.  The members of the LLC will lose their investment, but nothing more.  Members’ personal assets are protected.

Of course, the LLC does not complete protect you from all scenarios.  For example, if repairs are being completed on one of your properties and you or an employee injure a tenant; your LLC will most likely not protect you from that kind of liability.  However, if you are extremely concerned about asset protection, a knowledgeable attorney can help increase the liability protection you can gain from an LLC.

Income tax benefits are the most advantageous to LLCs.  A limited liability company that is owned by one person can be a sole proprietorship, a C corporation, or an S corporation and an LLC owned by two or more can be a partnership, C corporation, or S corporation.  A sole proprietorship would keep accounting straightforward and tax advantages of such business could be implemented.


A larger real estate investment fund might opt to operate as a C corporation or S corporation to take advantage of the distinctive tax advantages including the provision of tax-free benefits to employees and shareholders.  An S corporation allows a business to decrease  the self-employment, social security and Medicare taxes paid on the owner’s profits.  LLC owners benefit from pass-through taxation  and each member reports their own share of profits and losses own their personal, individual tax return.

To create a real estate LLC, you will need to transfer a deed to said LLC.  The deed must be filed with the proper official county offices after it is readied in the LLC’s name.

In the case of mortgages, investors who need to transfer the loan to an LLC will, first, need to contact their lender.  Depending on individual circumstances, the lender may or may not agree to allow the investor to be replaced by the LLC.  These kinds of transfers may incur costs and tax issues, in addition to any changes to present loans or mortgages.

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