Awesome thread guys. I would like to be clear on this.
Lets say my LLC brings net profit of $40000 and I am the only the guy who runs it. So does that count as I earned as additional 40k when I file tax return in april?
I work in a full time job and all I know is my employer gives me w2 form to file my taxes.
I am on assumption here LLC's profits do not need to filed separately like Corporations.
LLCs give you OPTIONS.
When you first file an LLC, you get to choose whether to be taxed like a corporation or taxed like a partnership. A partnership has the $$ flow through directly to the personal income tax (Schedule C, I think it is). A corporation means that it can potentially be taxed twice.
But here's the thing. You always hear about how corporations are bad and get taxed twice. You never hear about the reasons WHY you might want your LLC to be treated like a corporation.
For instance, did you know there are special tax write-offs that are bigger if the LLC is treated as a corporation? Because there are some things you are not personally allowed to deduct from your personal return, but a corporation can. And there is the thing of the tax RATE. The first level of taxation is only 15%, I think. Which means the rate will be lower for the first $50,000 or so compared to the rate you get taxed on your personal return.
But accountants LOVE LLCs that are taxed as a partnership. Why? Because filling out the forms is easier. It all just flows through. Plus, sometimes you can spend money in the entity to buy things and take legitimate deductions pre-tax in the LLC that you cannot deduct personally. Like health insurance and/or medical expenses, for instance. There is a 2% rule for deductions on your personal return. In other words, you must spend more than 2% before you can deduct those expenses. But an LLC treated as a corporation that provides medical benefits can deduct those expenses from dollar one.
Another one is college expenses related to the job done for the LLC. As long as all the employees get the same benefit, the entity can pay for or reimburse for training expenses. On a personal return there's a cap, I think. Since you are in the internet marketing field, let's just say you want to go to that training summit that's coming up . . . in Kuala Lumpur. (I'm making this one up, but consider it a hypothetical example.) Travel expenses, cost of the training, a reasonable per diem, deductible expenses for the LLC. Just make sure you keep good records of the expenses. It's easier if you have a corporate credit card, or a bank account and corporate debit card with Visa or MasterCard logo so you have things clearly segregated. (If there's only ONE employee, then make sure you document how this helps you do a better job and why you had to go to THAT one because if you get audited it's an area of scrutiny for the IRS.)
And if you are starting out strapped a bit for cash in the beginning, here's a big one. Say you plan to do something and have a viable business plan and want to take on an investor. If you have an LLC, you can split up the benefits in odd numbered ways. With a corporation, you split by percentages according to ownership. So let's say you don't make that much money. But your uncle, who is a successful doctor who is getting ready to retire, is willing to invest in your company. His tax situation is drastically different than yours. He needs tax write-offs, you've got yours covered with your mortgage interest from the house you own and don't need that many. But there are many expenses that can generate write-offs. You can structure your LLC so that he gets 80% of the write-offs and you only get 20%, yet you still both share equally in the cash profits of the business 50-50. Or, if you don't need the write-offs at all, you can give him 100% of the write-offs, and you still do a 50-50 split. It's all about how you structure the LLC and the operating agreement in the beginning of the setup. This one will require guidance from professionals but is entirely legal. Using a corporation you cannot legally do the same, as the write-offs are split along the same lines with the ownership. Meaning, if you get 50% of the profits, you also get 50% of the write-offs.
By the way, I'm not an accountant, and IANAL (I am not a lawyer) either. Don't even play one on TV. So check and then double-check everything I've posted here, because I probably made a mistake or two.
But I post here anyway to get your imagination working so that you can get maximum mileage from the entity you choose to file, whenever and wherever you choose to file it.
By the way, there is a book you might want to have a look at put out by Nolo Press. I cannot remember the exact name of it, but it gives incorporating instructions for all 50 states in one book, breaks it down by state, tells you where to file, what the official website is and everything, including phone numbers to the offices where you would file. It's updated rather frequently to keep up with the filing fees as they change, so make sure you get the latest version. The author is Anthony Mancuso. He also writes a great book on forming an LLC as well. Nolo. It's a commercial site.
P.S. I'm in Texas. I've filed an entity in Texas. Texas has a unique "gotcha" that you won't see coming until it's too late if you file in another state and then try to register here. It costs $300 to incorporate a for-profit corporation here ($25 for a non-profit last time I checked). But the "gotcha" is, if you get a Nevada or Wyoming or other state entity and then bring it to Texas to register as a foreign corporation, they charge $750 to register that foreign entity. But only $300 to file a Texas corporation (I think the LLC was $200 last time I checked, it's been a while.)
P.P.S. For info on Nevada, go to SecretaryOfState. It's a BIZness site.
