LLC Tax: Do I Pay Tax On Profits That Remain in the LLC Business
From an LLC tax perspective, the default tax structure for a limited liability company is pass through taxation which means that whatever tax is owed gets passed through to the owners of the LLC.
At the end of the tax year, the tax items of the LLC are reviewed and it is determined whether the business made a profit or loss. If it is a profit, then for tax purposes, the profit allocation is attributed to the members. If there is only one member, that member will have to pay taxes on that profit amount through his or her persona return. If there are multiple members, then the LLC Operating Agreement will dictate how the profit gets divided among the members and each will be responsible to report the profits amount allocated to them on their return.
It does not matter whether or not the LLC actually distributed those profits out to the members. Determining taxation is a different process. So, in the case where the limited liability company decides to keep all the profits in the business to reinvest in a later year, there could be a situation where members owe tax and did not receive any cash to cover the tax. Some LLCs will plan for this by always requiring at least an amount to cover profits tax to be distributed to members.
Speak to your accountant about LLc taxation details for your business and working with him or her to arrive at the best reporting, allocation and distribution plan for your particular business situation.
Mike Harmon said:
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