LLC question

[johnkgan]

Hi there,

I bought the material and took care of a lot of expenses (>20k) for my 25 year old son to open his own business. He created the products and presented them in art exhibitions which were received well but did not go beyond that. Also, though he tried, he could not start his business yet as he hasn't found any buyers yet. We both need to figure out how to go about with business as we don't have much experience in this matter. We heard that we should find an investor, spending from my salary won't scale for long. Regarding tax matters:

1. Can we open a LLC on both our names and claim 50% each of tax deductions for the material we bought and all the other expenses? Or should I claim 50% of those tax deductions on my name as only I paid for it?
2. As it is already October, can I still submit LLC and will I be allowed to take tax deductions for the expenses so far before submitting LLC?

3. Even though he did not make any profit from this business, can we still submit LLC?

I would appreciate any other information regarding this matter. Thank you so much!

[TomD8]

Regarding forming an LLC, I suggest you consult a tax attorney.  There are some tax issues you'll need to decide.  This IRS reference will give you an idea of what's involved:

https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partner...

This reference explains the IRS rules on LLC start-up expenses:

https://www.upcounsel.com/llc-start-up-expenses#:~:text=Federal%20tax%20laws%20allow%20LLCs,on%20sta....

[Anonymous_ · Accepted solution]

You need guidance from a local tax and/or legal professional for this matter. The issues can become quite complex.

The expenses you paid on your son's behalf (for his business) would be considered gifts unless you and he had a partnership agreement, in which case your payments would be considered contributions to capital.

You can organize and register an LLC with the state, but the default classification would still be a partnership for federal income tax purposes. The agreement may specify that you and your son share in the profits and losses on a 50/50 basis, but you will not be able to deduct your share of the net losses (from your ordinary income or capital gains) unless you materially participate in the business (and it does not appear that you do so).

See https://www.irs.gov/publications/p925#en_US_2021_publink1000104581

An LLC can be organized regardless of whether or not the business is profitable and an LLC can be organized regardless of the month in the particular tax year.  However, note that the default classification for multi-member LLCs is a partnership for federal income tax purposes and, as such, the LLC must file Form 1065 and issue K-1s to its members (which, again, will most likely require professional guidance and/or tax return preparation).

See https://www.irs.gov/instructions/i1065#en_US_2021_publink11392vd0e555

Again, seek guidance from a local tax and/or legal professional for this matter.