The primary downside to forming an LLC is economic, because it’s necessary to first pay an attorney to organize the entity and pay to file the articles. Also, LLCs are subject to a “gross receipt tax” upon the annual gross revenue or “receipts” of the LLC. There is no tax on the first $250,000 of annual receipts. The tax on receipts up to $500,000 is $900. At lower levels, the gross receipt tax is insignificant, but it can rise to around $25,000 for larger transactions. The gross receipt tax doesn’t exist with respect to entities like S corporations. However, due to the amount of gross receipts that can be earned without a tax being imposed, many LLCs never have to pay this tax, except perhaps upon ultimate sale of its assets.
Another disadvantage is that a multi-member LLC is treated as a separate taxable entity, which means that separate state and federal income tax returns will be required each year. There is also a charge to file the statement of information every year, which is $25.
How Is A Limited Liability Company Taxed?
The advantage of a LLC over a general (non-S) corporation is that it is a “pass-through entity”, meaning that the taxable income of the business is taxed directly to the owners and not once at the entity level and then again at the owner level when cash is distributed (as is the case in a regular “C” corporation.) As a pass-through entity, the owners of the LLC experience less of a tax reduction on its distributed business earnings. The same type of pass-through treatment is given to S corporations. A sole member LLC doesn’t require separate income tax returns.
For more information on Downsides Of An LLC And Taxes, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (916) 635-0302 today.