Income from LLC

Getting income from LLC means that your company is making a profit.

An LLC, or “limited liability company,” is a type of business structure that is very attractive to small business owners who are looking to get the benefits of a corporation without having to follow as many formalities. An LLC is like a corporation in that it provides its owners, or members, with personal liability protection.

This means that an owner will not be held personally liable for an LLC’s debts or legal liabilities, and therefore, the owner’s personal assets cannot be reached by the LLC’s creditors (except in very narrow circumstances).

Do You Need to Make Income to Be Considered an LLC?

An LLC does not necessarily need to make any income to be considered an LLC. In fact, any small business can structure themselves as an LLC so long as they follow the state’s rules for forming one.

For tax purposes, however, if an LLC does not make any income, then the owner of the LLC is not allowed to claim any tax deductions on things such as business travel, promotion, or cost of inventory. If the Internal Revenue Service (“IRS”) sees that you are deducting business expenses but not making an profit, they will likely audit your business.

If an LLC does earn income, then that income will be “passed through” to the LLC’s owners for federal income tax purposes. A pass-through entity simply means that the LLC’s owners will only report the business’s income once, and that is on their personal tax return. The business itself does not pay income taxes.

Depending on how many owners the LLC has (single member or multi-member), or if it elects to be treated differently for tax purposes (like a C or S corporation), there are different ways an LLC will pay taxes.

An LLC Can Choose to Be Taxed Like a Corporation

If an LLC wishes to do so, it can request that the IRS treat it like a corporation for federal tax purposes. Corporations are afforded certain tax advantages that may seem beneficial to an LLC. For example, corporations have more favorable self-employment taxes compared to an LLC. With a corporation, the owner is treated like an employee and must be paid a reasonable salary. Any of the corporation’s profits after that salary is paid may not be subject to self-employment taxes.

If an LLC elects to be taxed like a corporation, it must fill out the Entity Classification Election form 8832, check the “corporate tax treatment” box, and file it with the IRS.

In 2018, C corporations now pay a 21 percent tax on all of their profits. This tax rate is lower than the three highest individual tax rates, which range from 32 percent to 37 percent. By default, an LLC would be taxed this individual rate, whereas if they elect to be taxed like a corporation, they will benefit from the lower corporate tax rate.

However, the amount of money an LLC might save from paying a lower tax rate could become moot since it will now be subject to “double taxation.” Double taxation essentially means that the corporation must pay both the 21 percent tax on its profits, as well as its shareholders, or owners, individual income tax on their corporate gains.

What Business Expenses Are You Allowed to Deduct?

As most people are aware, the majority of the costs the business incurs will not be subject to taxation. This is because business expenses are allowed to be deducted or “written off,” on your tax returns. This makes a big impact because those expenses can be deducted from the business’s overall income, which reduces the amount that the business must report to the IRS.

Business expenses that qualify as deductible include:

  • Initial startup costs
  • Business travel
  • Promotion and marketing costs
  • Cost of inventory

Starting this year, an LLC as a pass-through entity is qualified for a new deduction of up to 20 percent of the business’s net income on their tax returns. Thus, if the LLC’s income was $100,000, they will be able to deduct $20,000 from their income taxes.

If you need advice on how to handle your LLC’s income, you can post your legal need (or post your job) on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.