LLC

[Cashrob817]

What are the tax complications with having an LLC for asset protection. And what all should I know about taxes with LLC in Texas? 

[K M W]

An LLC can be taxed in different ways, depending on how it is structured.  By default, LLC"s are business entities organized under state law, and each state has its own regulations for entities organized within its jurisdiction.

Depending on the elections made by the LLC and the number of members, the IRS will treat the LLC as either a partnership, a disregarded entity, or a corporation.

For federal income tax purposes, if your LLC has two or more members, it is classified as a partnership and is required to file a partnership return (Form 1065).  An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes - so a single member LLC's income and expenses would be reported on Schedule C of your individual tax return Form 1040. In other words, a single member LLC for federal income tax purposes is treated no differently than if you were a sole proprietor.

An LLC with either a single member or multiple members MAY elect to be taxed as a corporation for federal income tax purposes, either as a C corporation or an S Corporation.

So, for income tax purposes, unless you elect with the IRS to be treated differently,

• If you are the only owner of the LLC you will be taxed as a sole proprietor, and report the LLC income and expenses on your personal return, on Schedule C. 
• If you have other members of the LLC, your LLC will have to file a partnership tax return, form 1065.

The state of Texas imposes a franchise tax on most LLC's, which is different that the traditional income tax. For more information on the Texas Franchise Tax, see the link here:  Texas Franchise Tax overview 

[Faith C]

Thank you for asking. LLC, stands for Limited Liability Company and generally can protect the personal assets of members. For example, if your business got sued, only the assets of the LLC can be subject to the judgement lien, except some extraordinary cases. 

When filing tax for your LLC, you have the flextity to choose how to file it. For example, you can chose to file Schedule C with your individual tax return if you are the single owner of the business. You can also elect to be taxed as partnership or Corporation or even S-Corporation. Please see this article, LLC Tax Filing Rules, for more details. 

If the LLC is a single-member LLC, Texas LLC will be taxed as pass-through entities. In other words, the profits and losses will be reported on the owner's individual tax return. For TX, LLC can subjec to Franchise Tax and it all depends on your election on how to file it. Pls see the detailed list at Texas Comptroller webiste. 

I hope the above information helps. Please feel to contact us if you have any further questions. 

[Cashrob817]

Would my wife count as another member or still one member if she is listed on the LLC? 

[BettieG]

Hi @Cashrob817!  In short, yes.  In Texas, which is a community property state, an LLC owned solely by a married couple, can elect to be taxed as a single-member LLC (i.e., a disregarded entity).

I hope this helps!  If so, please give me a thumbs up!!

[tagteam]

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@Cashrob817 wrote:

Would my wife count as another member or still one member if she is listed on the LLC? 

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If both you and your wife are members of the LLC, then you have a multi-member LLC which, by default, is treated as a partnership for federal income tax purposes.

Note that there is an exception if you both materially participate and hold your interests as community property (since Texas is a community property state).

See https://www.irs.gov/pub/irs-drop/rp-02-69.pdf

[Faith C]

Texas is one of community property state and IRS respect taxpyer's election to be treated as either disregarded entities or partnership for a business owned by a husband and wife in a community property state. The husband and wife can be considered as a single unit and treated as disregarded entity based on IRS Revenue Procedure 2002-69. 

(1)  File one Schedule C for qualfied entities if: 

• The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States;
• No person other than one or both spouses would be considered an owner for federal tax purposes; and
• The business entity is not treated as a corporation under § 301.7701-2.

OR

(2) File two Schedule C's for Elected Joint Venture status if: 

• The only members of the joint venture are the spouses;
• Both spouses materially participate (within the meaning of Sec. 469(h), ignoring paragraph (5) thereof) in the business; and
• Both spouses elect this treatment.

Please see this article for your reference: LLC owned soley by spouses: A partnership or a joint venture? 

[tagteam]

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@Faith C wrote:

You may still file schedule C because you qualify as Husband and Wife Qualified Joint Venture LLC.

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In that instance, the husband and wife would each file a Schedule C (not only one Schedule C), in accordance with their interests in the LLC.

See https://www.irs.gov/pub/irs-drop/rp-02-69.pdf

[K M W]

If you and her are both listed as members, then it is a multi member LLC, and the general rules of it being a partnership still apply. However, if the husband and the wife are the only members of a LLC in a community property state, then they can elect to treat the LLC as a qualified joint venture and could file the business on two schedule C's on the individual tax return. See  Joint Ownership fo LLC by Spouse in Community Property States here:  IRS: Husband/Wife LLC in Community Property State 

[Opus 17]

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@Cashrob817 wrote:

Would my wife count as another member or still one member if she is listed on the LLC? 

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If your spouse is listed on the paperwork as a member separate from you, then she is a member separate from you.

It is important to understand that LLCs are created by state law and they are not recognized by the IRS as having any special tax status.  A single member LLC is treated by the IRS as a disregarded entity, the same as a sole proprietorship, and would file a schedule C (unless the SMLLC files special paperwork to be taxed as an S-corporation).

An LLC with more that one member is treated by the IRS as a partnership and files a partnership tax return form 1065.  This has different requirements, different deadlines, and substantial penalties for getting it wrong.  Each partner gets a K-1 statement from the partnership that is entered on their personal form 1040.  

The only exception to this rule is if the only 2 members of the LLC are spouses in a community property state.  In that case only, each partner files a schedule C in their name to report half the income and half the expenses.  In a non-community property state or if one of the members is not a spouse, the multi-member LLC must file a partnership return. 

The legal protections offered by an LLC vary from state to state, we can't give you legal advice on that.

[Opus 17]

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@Faith C wrote:

Texas is one of community property state. In other words, the husband and wife are considered as a single unit and are treated as disregarded entity. You may still file schedule C because you qualify as Husband and Wife Qualified Joint Venture LLC.

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An LLC with only two members, where both members are spouses, in a community property state, must file 2 schedule Cs.  One for each spouse, reporting half the income and half the expenses each.