Recently, real estate investors are beginning LLCs. If you are a real estate investor, you can protect your personal assets by forming a Limited Liability Company.
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Simply, though still in existence by law, the LLC terminates and restarts to create a new body. An LLC ceases for Federal Income Tax law when more than fifty-percent of the interest in profits are sold within one year. For example, if the S corporation earns profits that would be taxed as normal income earned by an individual, the corporation can pay the earnings as a “distribution to shareholders.”Ĭhange in ownership of the shares does not terminate a corporation for taxes. Every shareholder reports his share of the income on his tax forms, but that income can be re-typified. S corporations are taxed similarly to partnerships, as the taxes pass down to the shareholders. However, a C corporation is a separate body for taxation and is required to pay its own taxes. Each member is individually responsible for the taxes on his share of losses, profits, and deductions. When taxed as a partnership or sole proprietorship, an LLC is not a separate tax-paying entity. These gains and losses are recognized as capital gains and losses for tax purposes. However, a member does recognize a gain on a current distribution if it exceeds his level of interest in the LLC. The allotment is a non-taxable withdrawal of the member’s investment up to the level of his interest in the membership. Members may receive shares of partnership property without recognizing a gain or sustaining a loss. This limits one of the LLC’s flexibility in ownership levels. In addition, an S corporation can only issue one kind of stock.
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For example, an S corporation may not have more than 75 shareholders, and those shareholders can only be individuals and estates. The restrictions on the equity and capital structure of an S corporation can limit the flexibility in planning for your company’s growth. Each member reports his share in company’s gains, losses, deductions, and credits on his personal tax return. Choosing to have your LLC taxed as a partnership would subject it only to a single Federal Income Tax at the partner level. However, electing to do so would forfeit the “pass-through” tax benefits. LLCs with more than one member are usually classified as a partnership, but can elect to be treated as C corporation or S corporation. This form simplifies the process of allowing an LLC to elect how they would like to be taxed. The IRS has created the “check box” form, or form 8832 for C corporation or form 2553 for S corporation, to deal with how an LLC is to be treated for taxation purposes.
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Regardless of the method of taxation, the legal liability protection remains in place. All options should be examined to establish which scheme provides the greatest tax relief. By default an LLC is taxed as a sole proprietorship if it is a single-owner LLC, or as partnership if it has two or more owners. Members of an LLC can use the “check box” method and elect to have their LLC taxed as either a C corporation or as an S corporation by timely filing the 2553 form. The most remarkable benefit of an LLC is based on the flexibility by which it can be taxed.