An LLC tax election is the decision you make to determine how your LLC is taxed. An LLC is a unique 
business structure called a limited liability company, but the IRS Code has not given the LLC a unique taxation section. So how is the LLC to be taxed? It is taxed by something called an LLC tax election.
Most business entities such as corporations and partnerships have their own tax structures under the tax code. However, an LLC does not have its own tax structure under the IRS code. When it was first created in Wyoming, the legislature asked the IRS how they wanted it taxed. The LLC is not a Partnership; it is organized as a defective corporation. As a result, the IRS didn’t know whether or not to tax it as a partnership or a corporation.
LLC Taxation Rules
It took over 20 years for the IRS to give the answer. The IRS could have created another code section describing specific taxation rules for the LLC, but they didn’t. The IRS decided to let the LLC owners choose how they wanted it to be taxed. Publication 3402 outlines this decision. If you are wondering how to plan for your LLC tax election, look at your LLC and consider why you have the company, what it does, and who is involved. Then you need to understand the different election choices. These video explains the choices:
In a partnership, the tax code directs the partners to divide the profits and losses based on their percentage ownership of the partnership. The company then gives all of the partners a K-1 form telling them what their share of the profit or loss is. The partners then pay taxes on the gain.
The IRS Code gives corporations two separate tax choices. A corporation can be taxed under subchapter C of the IRS code or it can be taxed under subchapter S of the IRS code. Owners get to choose which code section they want to be taxed under.
Corporation Taxation Options
Generally, corporations like IBM, Bank of America, and all the big boys chose to be taxed under subchapter C of the IRS Code. Under this subchapter C, the corporation pays its own taxes directly to the IRS. The owners then pay taxes on their wages. Smaller corporations chose to be taxes under subchapter S of the tax code. Under subchapter S the corporation is taxed like a partnership would be taxed. The S corporation has to file a tax return, but then the actual earnings or losses “pass through” on a K-1 to the owners of the corporation. The profits are actually “recognized” by the owners pro-rata based on their ownership interests.
So what should the LLC owner do? If the owner does nothing and there is only one owner, the LLC will be taxed as a sole proprietorship. If there is more than one owner, it can be taxed as a partnership. The LLC owner can make an LLC tax election to have the LLC taxed as a corporation (either C or S). To make an LLC tax election the owner simply must file the appropriate papers with the IRS. What’s the bottom line? The LLC owner can choose how the LLC is taxed. The LLC Wizard has a LCC decision chart and audio instructions to help someone make the proper IRS election.
LLC Asset Protection
No matter what LLC tax election is picked, the LLC will have the same asset protection strength, and will operate the same. There is no such thing as a limited liability partnership, or a limited liability corporation. There is only a limited liability company taxed as either a partnership or corporation. An important thing to remember is that your little company is your best tax saver. If you are interested in saving taxes, look at my 10 Tax Tips. I hope this information is helpful.
Lee R. Phillips
I’m a Real Estate Agent with Earned income from commissions and payments for services but I also own a house with my husband that is a rental property. My husband is not a member of the LLC but my son is with a 20% ownership.
Which option should I choose for taxation? S-Corp or Partnership?
Thank you for your help.
The ideal situation is to have your real estate business as an S Corp and your rental property in a separate business as a partnership. If you are going to own everything in one business you would want to talk to an accountant who can determine which is better based on your particular circumstances.
Dear Sir,
First of all, all of your videos are fantastic.
I couldnt find your contact email, hence writing to you here.
I am planning to start a Delaware LLC, and before doing so would like to know what taxes I will have to pay at Federal and State level (or any other taxes/fees etc within the US for that matter).
I am a US non-resident alien, providing services/products to clientele outside the U.S (mostly within the CIS region).
My main business, at this point, is making and selling websites, providing email marketing services, online commerce, logo making, general branding and other related services. I use online services like Wix.com (Israeli company), Gmail (a US company) and Madmimi.com (a US company) to provide my services/products, and am not sure if that would constitute a US source of income and be taxable.
Will I have to pay taxes in the US?
What tax election would you recommend for my LLC?
Would you be able to provide advice in this regard? I am willing
Thank you!
Serdar,
If you don’t live in the US and you don’t make your money in the US then you don’t need to pay taxes in the US. Forming an LLC in the US will just make it so you do have to pay taxes here.
Serdar,
If you form an LLC in Deleware you will pay taxes in the US because your LLC will be considered to do business in the US.
You won’t have much of a choice for tax election. You have to be a US citizen or Resident Alien to be a S-Corp so your only options are sole proprietor if you are a single member LLC or partnership if you are a multi-member LLC.
Hello Sir,
I am planning to register an LLC in Delaware. Am not a resident of US. Basically am a full time day trader. Am forming the LLC to do the same (futures trading). I will be the single owner in the LLC. I will be making money through Futures Trading in commodities and Equity Index like the S&P 500. My question is – How much will I be taxed or my LLC will be taxed if I make a profit of say $1 Million in a year? And lets say if I make more? Like $25-$30 Million per annum, how much tax my LLC has to pay? Please advice.
Sohan,
Since a LLC in most cases is a pass through entity, the taxes would be the same if you had an LLC or didn’t have an LLC. Whatever your personal tax rate is will be the tax rate you pay for money made in the LLC.
What is the tax slab? For LLC’s? Like Short Term Capital gains?
Sohan,
There is no tax slab for an LLC. With an LLC you pick how you want it taxed. You can have it taxed as a disregarded entity, partnership, S-Corp, or C-Corp. Depending on which way you have it taxed you pay a different rate.
I want my LLC to be taxed as a disregarded entity. What if my short term capital gains are $10 million a year? How much tax am suppose to pay on $10 Million?
Sohan,
If it is short term (less then a year) the capital gains tax rate is the same as your personal tax rate. If it is long term (more than a year) then the capital gains tax rate maxes out at 20%.
Hi, I formed LLC IN DELAWARE ON May 23,2018 AS ALIAN. I APPLIED for EIN YESTERDAY.
I AM NOT US CITIZEN AND WILL OPERATE LLC FROM INDIA. I will send goods from India.
My question is that
1) Am I required pay tax?
2) am I required to file any details to IRS yearly / quarterly ?
If yes ! Am I required any agent or tax expert ?
If you are making money in the US then you will have to file a tax return in the US. You will have to file at least yearly. You don’t have to hire an agent or tax expert but it may be helpful if you are not familiar with how to file US taxes.
Hi Lee, I bought your Operating Agreement and I would like your opinion if I should organize as a Individual LLC or Multi LLC or S-Corp. I am an Licensed Insurance Producer in Michigan, married, empty nester. I an also licensed in Florida.
Wallace,
I can’t really advise, but I would use an LLC and if my income is selling goods or services, I would elect to have my LLC taxed under Subchapter S of the IRS Code.
Hello,
My husband and I formed an LLC today. We have not yet gotten an EIN or bussiness bank account.
My husband did it as a sole owner and he will be providing both services but also he will be receiving commissions as well as long term residuals.
My question is:
For tax purposes, what type of set up will save us most in taxes?
Partnership or Corporation (S or C)?
Thank you for all the content you have provided on the internet so far. Great information!
Mariela
Mariela,
If the income will be passive or unearned income (rents, etc.) then just have the LLC be a sole proprietorship. That would use his social security number. The IRS calls that a disregarded entity. If the income is from the sale of goods or services, the probably a Subchapter S designation with an EIN. This is general, so check with your accountant to personalize your decision.
I hear a lot that I must pay myself as an employee if I own my own company. Can I pay myself as a 1099 contractor instead and take owner distributions. I don’t mind paying for info if its reasonable. I just want to avoid payroll and unemployment taxes.
Giovanni,
Everything depends upon how your company is taxed. If it is an S corporation type tax structure, the law says you have to take a “reasonable salary” and you can distribute the rest without “social taxes”.
Jeff,
Thank you for the great information you put out. I have your Asset protection course and LLC course. In your you tube video you talked about notifying the IRS when you transfer your personal stock ownership out of your own name and into the name of your trust (I have a LLC taxed as a s corp, disregarded entity) What for do I use to notify the IRS that My Qualified Living Revocable Trust now owns 100 percent shares? Your you tube video says that’s a topic for another you tube video but I can’t find that video. Do I use IRS form 2553?
Thanks Lee
Jeff,
That is only when the trust is an irrevocable trust. When you die your living revocable trust will become irrevocable, so that is the trigger. You could of course set up an irrevocable trust at any time, but most people don’t do that. during your lifetime you living revocable trust is “revocable” and is a true disregarded entity, so you can put the Subchapter S ownership interests (stock in a corporation or membership interests in an LLC) into your living revocable trust and no action is required to maintain the Subchapter S status of your corporation or LLC. When an irrevocable trust gets the Subchapter S ownership interest, then within two months and 15 days, the IRS has to be notified. That is done with the 2553 form. It basically qualifies the trust as a Qualified Subchapter S Trust (QSST). As for your comment, “I have a LLC taxed as a s corp, disregarded entity,” your statement here worries me, because you could not have an LLC taxed as a Subchapter S entity and consider it a disregarded entity. Only an LLC taxed as a sole proprietorship could be considered a disregarded entity. If you have an LLC taxed under Subchapter S, you need an EIN and it certainly isn’t a disregarded entity.