Is there any tax advantage or incentive to leave money in an LLC at the end of the tax year?


4

We're forming a 2 person LLC and part of what we're trying to figure out is how much to leave in the LLC to build up some capital reserves.

Since an LLC is a pass through tax entity if the LLC earns $100,000 and then we leave $30,000 in each year, my understanding is that on our taxes we'll still pay income tax on the $100k regardless of how much we leave in the LLC. Is that correct?

Is there any difference at all from a tax perspective between the money that we distribute to ourselves and the money we leave in the LLC?

LLC Legal Tax Accounting

asked Apr 23 '11 at 10:57
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Todd H
196 points

1 Answer


3

Yes and no.

You are correct that an LLC is treated as a pass-through entity by default, and as a result you will have to pay income taxes on all of your profit, whether you distribute it or not.

But there is a way around this. You can choose to have your LLC taxed as a corporation by filing Form 8832 Entity Classification Election with the IRS. This allows you to keep your business structure as an LLC, while opting for corporate taxation. In this case, if you only take out $30K, then you will only have to pay income taxes on that $30K, and you can leave the remaining $70K untouched.

You should speak to your accountant about this. He/She can tell you if this makes sense for your particular situation.

You may also want to read How does a business owner take money out of their business and Simple Overview of LLC Pass Through Taxation for more information.

answered Apr 24 '11 at 01:45
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Zuly Gonzalez
9,194 points

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