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Income Taxes for Limited Liability Companies (Texas LLC) - YouTube
Channel: Paul Freeman Law PLLC
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LLCs are responsible for federal income tax
the same way individuals are.
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Every year, you, as an individual, report
your income to the Internal Revenue Service
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and pay the associated taxes.
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Well, LLCs have revenue also that needs to
be reported to the IRS and the associated
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taxes paid.
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Now, how that revenue is reported and how
those taxes are paid depends on the structure
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of the LLC.
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The rules for reporting and paying taxes come
from the Internal Revenue Code, which is Federal
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law.
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This federal law doesn't exactly follow state
law regarding LLCs.
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Remember it's the Texas Business Organizations
Code that allows for LLCs to be legal business
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entities.
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So, the IRS doesn't have rules specific for
how LLCs are taxed.
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The IRS does have rules for how individual
people are taxed, how partnerships are taxed,
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and how corporations are taxed.
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This means that LLCs are either taxed by the
IRS as an individual person, partnerships,
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or corporations.
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How do we know which way the LLC is going
to be taxed?
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By the number of people who are Members of
the LLC.
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If the LLC only has one member, the IRS taxes
the income from the LLC as the income of that
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one Member.
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It's like the LLC doesn't even exist and the
income belongs to that one member.
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This is called a "disregarded entity".
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The revenue of the disregarded LLC is reported
on the single member's personal income tax
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return.
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If the LLC has more than one member, the IRS
taxes the LLC income as the income of all
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the members together, like a partnership.
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Each member is responsible for paying income
tax on that partner's share of the revenue.
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This is called "pass through" taxation.
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In this case, the LLC does have to prepare
a tax return and a Schedule K-1 for each partner.
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These are the default rules the IRS follows:
"disregarded entity" for one-member LLCs;
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and "Pass through" for LLCs with more than
one Member.
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But remember, I mentioned that the federal
tax rules allow LLCs to be taxed as corporations.
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Corporations are recognized by the IRS as
their own individual entities.
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Corporations file their own federal income
tax return and pay the taxes on that income.
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However, this results in a double taxation,
because, when the Corporation pays a distribution
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of profits to the owners, like paying a dividend
to shareholders, the owners must report that
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distribution as their personal income.
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This is called a double tax, because taxes
are paid twice, once at the corporate level
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and a second time at the owner or shareholder
level.
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Small corporations can elect to be treated
as Pass-through entities to avoid this double
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taxation.
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When a corporation makes this election, it
is referred to as an "S-Corp".
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This Planning Guide is designed to help you
prepare for organizing a new LLC.
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The Planning Guide is made up of 5 parts.
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Each part has sections.
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Each section has an instructional video.
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These instructional videos start by explaining
the underlying legal concepts for that section.
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Each video also includes a demonstration for
how to fill out that section of the planning
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guide.
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In each demonstration, I'll show you how I
would use the guide to plan an LLC called
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"Fake LLC".
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