LLC Entity 101 - Personal Franchise

What I have learned about LLC's by stetting them up for my entities?

Why set up a LLC as a Sole Proprietorship, a Partnership, a C Corporation or an S Corporation? We kept hearing that a Limited Liability Company (LLC) is a terrific tax entity, asset protector and less effort to setup and operate. The number one reason was because of its flexibility. Specifically, an LLC can be taxed as:nn * sole proprietorshipnn * partnershipnn * S corporationnn * C corporatio

An LLC is not a TAX entity, it is a LEGAL entity. Because it is a legal entity, the LLC can choose how it wants to be taxed. If you are considering using a LLC as either a S corp or an C corp, we suggest you go ahead and do that rather then setup a LLC. There are years more of case law supporting them and LLC's are still newer and have less law so far to back them up..

Do you know how your LLC is taxed? If your LLC did not make an election, then it is taxed as a "default classification.".
To help clarify default classifications are:

If your LLC has one member (owner), then it is disregarded for tax purposes (Disregarded Entity). This means that all the LLC activity is reported by the owner and the LLC files no separate federal tax return. 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.nn*Special rule*
If you and your spouse are the only owners, 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 service or product oriented that will be 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 As a 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.

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

Your working understanding of tax Law is that you probably think the tax code is way too large and way too complicated for you to understand. But that is simply not true. You can develop a working understanding of tax law in half an hour. That doesn't mean you will suddenly be an accomplished tax professional, but it does mean you will have the tools necessary to manage your income tax and identify legitimate deductions.

The two basics of tax law are which income is taxable and when, and which expenditures are deductible. If you don't know the basics you are flying blind. One thing is certain, if you don't understand tax law it is impossible to manage your income tax.

One of our goals today is to simplify tax code and make it disce
ible to you. One of the major points many overlook in starting a business from their home is the type of entity they create, determining a tax strategy and how important it is to choose the correct ones. You don't always have to start out in the perfect entity but you should have a plan to migrate to it as soon as possible or as soon as the funds become available.

Is this important? Yes it is! There is a major difference in the way entities are taxed. If you are filling your taxes under your personal social security number, you will be filling a separate schedule C on your 1040. If you have created a separate entity (Corporation) you will file a completely separate filing.

So what is the difference? Lots, One is legislated so that someone else (Governing Body) determines what you can or can not deduct and the other is not. A corporation's by-laws and business plan determines what is deductible or not, and that makes a huge difference.

When we are through we will arrive at this conclusion. Section 162 giveth, and the rest of the tax code taketh away. That is the conclusion we will eventually come to in this paper, but we aren't there yet. In our experience, very few taxpayers have an effective working knowledge of tax law.

Most tax professionals do have a working knowledge of the technical details of the code, but few of them have the knowledge I am going to give you today. In just the time you read this article you may very well know more about tax law than your tax professional does.