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LLC Tax Treatment

LLC Tax Treatment

All income of the LLC is passed directly through to the personal returns of the members. When property is transferred to the LLC or distributed from it, there are no separate tax consequences. Except in unusual circumstances, the general rule will apply, and no gain or loss will be recognized on a contribution to or distribution from the company. There is no tax when funds are withdrawn from the company. The only tax paid is on the income earned, which is reported on the owner’s personal tax return. This system avoids the complications and potential double taxation that plagues the corporate format. If an LLC has a single member, it can elect to be disregarded for tax purposes and the items of income and loss appear directly on the Schedule C without the filing of a federal tax return. Alternatively an LLC can elect to be taxed as a corporation. This may be useful in certain unique situations but probably not for the average investor or business owner.

THE FAMILY SAVINGS LLC

The Family Savings LLC can be used as an alternative to the Family Limited Partnership in many circumstances. In particular, individuals who are not primarily concerned with estate tax savings; will find that the Family Savings LLC has all of the asset protection features of the FLP but may be more convenient and flexible to create and maintain.

The Family Savings LLC is a specially designed type of Limited Liability Company (LLC). The LLC is a legal entity created by statute and permitted in all fifty states. The purpose of the LLC is to allow individuals to conduct their financial and business affairs in an efficient and convenient manner. It combines the best features of corporations and partnerships while eliminating many of the problems and complexities associated with each.

The LLC provides the protection from liability of a corporation without the formalities of corporate minutes, bylaws, directors and shareholders. At the same time, the LLC is treated like a partnership for tax purposes. That means that the LLC pays no income tax. All of the income and deductions flow through directly to the members personal tax returns. Further, like a partnership, the owners are permitted to adopt very flexible rules regarding the administration and operation of the business of the LLC.

SERIES LLCS

The Series LLC is a relatively new variation of the LLC, now adopted by legislation in eight states (Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, and Utah) with more sure to follow as the legal and tax issues are clarified by the states and the IRS.

The purpose of the Series LLC is to allow for the creation of a master LLC, which is then divided as needed into one or more separate LLCs with common or varying business purposes, governing rules, and ownership interests. The key is that each of the sub-LLCs is intended to be treated as a distinct and separate entity—each isolated from the liabilities of the other.

  • Each unit has its own owners (members) and may be managed separately from the master LLC and other units.
  • Each unit must maintain separate books and records.
  • As with a regularly formed LLC, the owners (members) of each unit are not financially responsible for the debts and obligations of the other units.
  • A unit may conduct part of the business of the master LLC, or may conduct a wholly different business.
  • Each unit has its own assets and liabilities. The members of each unit are treated under the laws of the state where the master LLC is formed as owning an interest in only that unit, and have no rights as members of one unit in the assets or income of any other unit.
  • Each unit is liable only for its own debts and obligations. For example, this type of vehicle would be popular with real estate investors who own multiple properties. A Series LLC would be formed and would provide for a subdivision into separate sub-LLCs—one for each property. It is easy and inexpensive to create the protection of multiple LLCs without additional cost or extensive paperwork on each. The idea is to achieve the benefits of liability protection of separate LLCs without the costs of formation and state taxes associated with separate entities.

Since the concept is new, we don’t have definitive law on how these structures will be regarded by the courts or the IRS. Utah, which does not have Series LLC legislation, has announced that Series LLCs from other states will be permitted, but each entity in the series will be required to pay the full Franchise Tax (minimum $800). Once the legal treatment of the Series LLC has been settled, it may be useful and convenient in a variety of circumstances, but outside of the states which have passed specific legislation, the outcome remains open to question.

Free Consultation with a Business and Tax Attorney

When you need help as a start up or existing business, call Ascent Law for your free consultation (801) 676-5506. We want to help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506