How Should Your LLC be Taxed?

How Should Your LLC be Taxed?
The Limited Liability Company (LLC) is a terrific tax
entity. The number one reason is its flexibility.
Specifically, an LLC can be taxed as:

- a sole proprietorship
- a partnership
- a C corporation
- an S corporation

Do you know how your LLC is taxed?

If your LLC did not make an election, then it is taxed as
the default classification. The default classifications are:

If your LLC has one member (owner), then it is disregarded
for tax purposes. This means that all the LLC activity is
reported by the owner and the LLC files no separate federal
tax return.

*Important note: Some sates require disregarded LLCs to
file a state tax return.

If your LLC has more than one member, then it is taxed as a
partnership and files a partnership tax return.

*Special rule: If you and your spouse are the only owners
and you live in a community property state, then you can
choose which of the two classifications you want to use.

If your LLC made an election, then your LLC is taxed as a C
corporation or an S corporation.

Do you need to make an election for your LLC to be taxed as
a C corporation or an S corporation?

This election is typically recommended for operating
businesses that are profitable. This election is typically
not recommended for LLCs that hold investments, such as
stock or real estate. LLCs that hold investments are
typically best left in their default classification.

When should your LLC make the election to be taxed as a C
corporation or an S corporation?

Once you have determined your LLC needs to make the
election, you then need to consider the rules of when the
election can be made:

*General rule: The election can take effect up to 75 days
prior to the date the election is filed and up to 12 months
after the election is filed.

Example: An LLC files its election to be taxed as a
corporation on October 15th. The effective date for the tax
election can be as early as August 2nd (75 days prior to
October 15th) or as late as October 15th of the following
year or any date in between.

*Special rule: For newly formed LLCs, in most cases, the
LLC can file the election as late the original due date of
the first corporate tax return and the election is
effective as of the first day of the LLC.

Example: An LLC is formed on October 1, 2007. The LLC files
its election to be taxed as a corporation by March 15, 2008
which is the due date of the first corporate tax return.
The effective date of the election can be as early as
October 1, 2007.

Understanding the fundamentals of entities, particularly
LLCs, is a key part of building a wildly successful tax
strategy.

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Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University. For
more information, please visit
http://www.provisionwealth.com