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A few questions about investing in an LLC

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I am investing in an LLC and will own 5% of the company. We obviously hope to do well financially, but wanted to see what I can do to help with taxes from the profits. The 5% ownership will be in just my name. 

My wife and I will continue to work our current jobs and make enough each that we fully pay our required social security taxes. 

I have read read some articles and another investor discussed the tax implications of this and the percent of taxes to be paid have ranged from 18% (plus state taxes) up to 47% (CPA told us this amount).

For those that own an LLC, what is your tax rate? What can I do to lower my expected taxes? 

thanks

 

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A multiple-owner LLC will pay taxes as a partnership and send you a K-1. They can also elect to be taxed as a corporation and distribute the profits to you as dividends on 1099-DIV.

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JavaCoder said:   A multiple-owner LLC will pay taxes as a partnership and send you a K-1. They can also elect to be taxed as a corporation and distribute the profits to you as dividends on 1099-DIV.
  No, the partnership does not pay income taxes at the partnership level. OP, generally, you will have to pay taxes on your share of income (even without distributions). Just make sure you have the cash to do this if the operating agreement doesn't spell out distributions to cover members' taxes. You could be stuck with a bill and no cash to pay it (especially if the majority later tries to squeeze you out).

For state taxes - it varies widely. In some states the partnership will withhold and you may or may not have to file a return, in other states you can elect to pay the taxes yourself and the partnership won't withhold, and in other states the partnership just files a return for all of the partners and automatically withholds.

The rate depends on whether profits are subject to the SE tax, and also what your personal tax characteristics are (in addition to how the operating agreement is written if there's tax planning involved).

Not trying to turn this into a political thread, but it should be noted that the current blueprint does set a 25% rate on the distributive share of pass through income.

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You pay taxes on your 5% share of gains or losses, however you could potentially be hit with a big tax bill without seeing a dime of the profit as the cash can be reinvested back into the company.

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chocula said:   I have read read some articles and another investor discussed the tax implications of this and the percent of taxes to be paid have ranged from 18% (plus state taxes) up to 47% (CPA told us this amount).

For those that own an LLC, what is your tax rate? What can I do to lower my expected taxes? 

thanks

 

  
I've seen LLC's K-1s that generate a huge range of tax rates, from negative amounts (where the LLC passes out losses and the members have basis to claim them on their personal returns), to K-1s that show massive income that is also subject to SE taxes (and can get the tax range into the 50% range).  It really depends on how much income or loss it is going to kick out to you, as well as the character of that income, as there are differences in the tax treatment of ordinary business income or loss, vs portfolio income (interest, dividends, capital gains), vs other passive income (rental activities).  

As far as what you can do to help get your tax bill down, unless you are involved in running the LLC (and then could potentially claim unreimbursed business expenses directly against the income, but as a passive member, I don't believe you can do that, but I really haven't looked deeply into it either), or purchased the units for a price greater than the percentage of capital in the LLC and the LLC has made a 754 election (though that is really fact dependent), there isn't a ton you can do directly.

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Thank you everyone. I invested in the company yesterday.

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chocula said:   Thank you everyone. I invested in the company yesterday.Although I suspect it's too late, and especially as a minority shareholder, the best thing to do is adopt a rule requiring tax distributions in a shareholder’s agreement or bylaws.

Otherwise, the majority could "oppress" you by making millions in profits without any distributions, leaving you with large tax liabilities and an incentive to sell a healthy company.

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