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LLCs and Taxes


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Warning: Your FIRST LLC Tax Return is due March 15th the year after it is set up. So if you set it up in 2021 your first tax return is due March 15th 2022 -  EVEN IF YOU DIDN"T MAKE A DIME! The late filing penalty is $290 per month per member. 4 months late with 5 members the penalty is $5,800. Make sure you file on time.

I prepare almost 200 tax returns a year. When it comes to an LLC the IRS will let you choose how you wish to be taxed. As a Multi Member LLC you can be taxed as a Partnership. Not a way to save any money. You can choose C-Corp, also not a great choice. However without looking at anyone's tax returns I would think an S-Corp would be your best choice. It allows principals to receive a distribution which is not subject to self employment tax only passive income tax. 

Example: The LLC makes a profit after expenses of $100,000 and there are two members. If the LLC issues paychecks to each member of $30,000 ($60,000 total) that leaves $40,000 not subject to self employment tax. Each member then receives a distribution of $20,000. That saves around 15.3% self employment tax or $3,060 per member. They will still pay income tax depending on their individual income tax bracket but they saved $3,060 each on self employment taxes.

Each of you should purchase "The Tax and Legal Playbook" by Mark J. Kohler and study this topic in more detail.

Your LLC also needs an operating agreement to holdup in court. If you treat it just like a C-Corporation when it comes to maintaining meetings, minutes and record keeping it will protect you. Failure to do so can end up with the LLC being set aside. This works just like a when a judge allows a plaintiff to pierce the corporate veil and pursue each officer individually. Lee Phillips at LegalLees.com has a great course on LLCs. Let me know if I can help you with that.

Good Luck and Good Investing

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