How can you keep money in an LLC account when it isn't taxed directly?


5

I know LLCs can be pass-through tax entities, so you don't pay tax at the LLC level but only on the income of each member. Is the money only taxed when used to pay members? Can you keep money in the LLC that doesn't go to members?

If you earn money as an LLC but you want to use that down the road to pay for company expenses, is it not taxed? What if it earns interest? Do you just pay taxes once members take payment?

I will certainly ask an accountant about this issue, but I would like some initial guidance.

LLC Tax

asked Dec 8 '09 at 12:39
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George Jenson
108 points

3 Answers


6

The income on an LLC is passed through to members each year. That means whatever you make, you have to pay personal taxes on it even if the money stays in the LLC (via a Schedule K1). The key word here is makes money. Some LLC's (like the ones that hold property), can depreciate the property value -- thus offsetting any cash gains.

LLC's can also be setup to be taxed as a corporation (I'm not sure if that varies state to state or not).

If you will be cash flow positive and making money right away, you might want to look into a C-Corp if you are worried about your personal taxes (although, you would have to pay the corporate tax, which is lower than personal taxes).

It can get kind of complicated so you are wise to consult an attorney or accountant. What I would suggest is having the details down on exactly what you are worried about. That way, you can run the scenarios.

answered Dec 8 '09 at 13:12
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Jarie Bolander
11,421 points
  • +1, all income flows to personal taxes. C-corp taxes are almost surely MORE than your personal taxes though, although that will vary by state. Consult accountant. – Jason 10 years ago
  • As long as you satisfy your tax obligation, the choice is yours whether to distribute your earnings (payable to you as salary/dividends) or keep it on account for the business. Keep some in reserve for expenses; that way if you have a slow month you won't have the headache of needing to lend the business money to pay the bills. – Scott Wilson 7 years ago

3

IANAL, and pardon me if I am incorrect, but I think what your are talking about is called Retained Earnings.

Depending on the amount of money (i.e. earnings) you wish to retain within the business, amongst other things, it can make more sense to go for a full blown C Corp. Also it depends on your location. For example, in the U.S., there are certain limit amounts for what the IRS deems "excess" RE that are kept in businesses.

  • The limit and tax rates depend on the type of business. (i.e. LLC vs C Corp)
  • LLCs have lower limits for $ that they can keep in the business than C Corps
  • C Corps are taxed at lower levels if they remain within their (higher) limit

However, it should also be noted that C Corps' retained earnings can sometimes be subject to double taxation, depending on what accounting methods and equity/payment structures you use. The links provided should help a whole lot more than I personally can.

There is a good article describing LLC Tax Implications, that may help.

There is also a good article describing RE for corporations Finally, there is a great article describing the difference between the two.

answered Dec 8 '09 at 22:12
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Nbeecroft
515 points

0

It is not exactly clear what you are asking, but I think you are basically asking if you can keep money in an account in the LLC's name.

You can do what you wish with it, but it is taxed regardless of being paid out to the partners or not.

Keeping money aside for expenses is probably a good idea.

Talk to an accountant and attorney. After looking at all the options one of my ventures is a simple DBA and the other is an S-corp. (which is simple to turn into a C-corp later on.)

answered Dec 8 '09 at 14:02
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Tim J
8,346 points

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