There are multiple reasons to form a Limited Liability Company (LLC). However, it’s worth noting that tax compliance requirements and costs can change depending on whether an LLC has multiple members or a single member.
A single-member LLC does not require a separate federal tax return to be filed for the LLC. Taxable income and deductions would be reported directly on the single member’s tax return. Any tax liability would be reported and paid by the single member as well. There may be additional filing requirements to consider at the state level.
Multiple-member LLCs require a separate federal tax return, and potentially a state tax return, to be filed if the LLC reports income or deductions. This separate tax filing can add material tax preparation and bookkeeping costs. Taxable income and deductions are still ultimately reported on the members’ federal tax returns, and the federal tax liability is then paid by each of the members based on their allocation of the income.
It is not uncommon for vacation homes or other personal assets to be owned by an LLC. It is important that if a multiple-member LLC is formed for any purpose (for example, an LLC owned by both spouses) that:
- There are legitimate legal, estate planning, or other personal reasons.
- Organization documents are provided to your tax preparer as soon as possible.
- Books and records are tracked carefully. Ideally, a bookkeeper is used to ensure proper records. Both a balance sheet and a statement of profit and loss should be provided to your tax preparer.
- A separate bank account is maintained to keep personal transactions separate from the LLC’s transactions.
- An Employer Identification Number (EIN) is obtained.
Notify your tax preparer as soon as you’ve formed a new LLC, as well as any time there are changes in the ownership of your LLC. If a separate tax return is required, it has an earlier due date than your personal income tax return (March 15 for calendar-year taxpayers).
Please reach out to your engagement team at Wolf & Company if you have any questions.
