FAQs About Tax Responsibility When Set-up with KMAGB.com
For tax purpose the LLC is usually set up as a disregarded entity. Meaning income and expenses flow through to the owner(s) for tax purpose. You make a periodic payment to the LLC as per the promissory note and you get a tax deduction. But the payment you made is now income to the LLC, which you own and it ends up flowing through to you, making the structure tax neutral. “Disregarded entity” is a legal and tax term meaning all income and expenses flow through to owner(s) of the LLC making it a tax neutral structure. In any state, any one person can own an LLC and it can be a disregarded entity for tax purposes. In a community state a husband and wife could own the LLC 50/50 and the LLC could be a disregarded entity. States in which community property laws apply: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington State and Wisconsin. (Additionally the state of Alaska and the US Territory of Puerto Rico give you a choice if you wish to hold assets in a community property). In non-community state a husband and wife could own the LLC 50/50 but the LLC would not be considered a disregarded entity, it would be a partnership. But even then, it is taxed as a pass through to the partners with a K1 to each of them. In any state if the owners are not married then the LLC would not be considered a disregarded entity, it would be a partnership, meaning the profit and loss would just flow through to each of the respective members via a K1. Each member would then report his/her share of profit or loss on their respective annual personal tax returns in their respective state. Ideally in non-community states and in non-marital partnerships, each of the husband and wife or each of the Partners should set up his/her own LLC. Hence each LLC entity would then be considered a disregarded entity and income as well as expenses would flow through to each owner of each LLC making it a hassle free, tax neutral entity.