Distributions from an LLC

by

Knowing how your distributions from an LLC are taxed is critical to your LLC formation strategy. After your LLC is formed, your business is up and running, and revenue is flowing, will you come to that important point where you distribute money to the partners. That may be just you, your spouse, or other outside partners.

Some people just write checks from the LLC to themselves, as the owner, and really don’t consider the tax ramifications of their actions. This is especially important anytime you have a partner, whether that is a spouse, outside partner, or a separate legal entity.

LLC Distributions

LLC Distributions

Let’s address some basic fundamentals first, then get into more details:

The first step is to be aware of how your LLC is taxed. Are you a single member LLC taxed as an S corporation, or disregarded for tax purposes? If you have earned income and a single member LLC that will flow through to schedule C, you are basically operating as a sole proprietorship, but have the liability protection of an LLC).

Test question: Is there any payroll for a single member LLC? The answer: depends. If the LLC is disregarded for tax purposes, there is NO payroll to the owner. Is it possible for a single member LLC to have employees? Yes. If the single member LLC is taxed as an S corporation, the active member (owner) would have payroll and distributions. If you have a single member LLC taxed as an S corporation, of course, the only member is active. If you have a two-member LLC taxed as an S corporation, it is possible that the second member could be passive (this could be a spouse or silent partner). Would the passive member be the manager of an LLC? No. By definition, if passive, they would not be running day-to-day operations. Keep that in mind.

A single member LLC taxed as a C Corporation; there would be, at some point, some type of payroll to the owner of the C Corporation. Is it possible that there was only enough revenue in the LLC taxed as a Corporation to only pay business expenses and not enough profits left over for any type of payroll? That is possible. You may take dividends out of the LLC taxed as a C Corporation, but keep in mind dividends are NOT deductible to the LLC taxed as a C Corporation’s profits.

read more