Discussion:Client Taking Draws from LLC

Does an LLC file a separate tax return for the company, as well as a personal tax return? He has just started his company and has not found an accountant for tax purposes yet. I am doing his payroll and bookkeeping sorting everything so that when he does find the accountant, everything is neat and organized.

Can anyone out here help me with this?

Yes, there is a certain percentage, but I don't know what it is. Probably somewhere between 0% and 40%, depending upon a whole bunch of other factors. The percentage is based on Schedule C earnings, not on the draws he takes.

A Schedule C owner is not paid through payroll (though his employees are, if he has any). The owner of an unincorporated business pays taxes through quarterly estimated tax deposits due 4/15, 6/15, 9/15 and 1/15 each year. Use Form 1040-ES.

Tell him to find an accountant quickly.

That being said, simply assuming this is a disregarded entity can be dangerous. If he did any check-the-box elections (business owners who form their own LLCs have been known to make elections without knowing the consequences), he could be taxed as either a C corp or S corp. That would radically change the above answers.

When he goes to the accountant, make sure he brings along copies of all the business formation papers for the accountant to review.

I should also get him to make a tax payment by 9/15 if he hasn't gotten an accountant by then.

I have already set up his payroll and made his first 941 tax payment on 7/16 for his employees.

• LLC as a disregarded entity: Cash taken out is not taxable. Profits are taxable whether or not cash is withdrawn.

• LLC as a partnership: Guaranteed payments could be taxable as SE income reported to the owner on Sch. K-1. A partnership is a flow-through entity wherein profits are taxable whether or not cash is withdrawn. Also see last point.

• LLC as an S corp: Payments to owner/employee are either taxable compensation or non-taxable distributions of AAA. An S corp is a flow-through entity wherein profits are taxable whether or not cash is withdrawn. Also, see last point.

• LLC as a C corp: Payments to owner/employee could be taxable compensation or dividends (taxable) or see below/

• Payments by a partnership, S corp or C corp to an owner could also be loan repayments (non-taxable) or returns of capital (taxable if basis is exceeded).

-- Larry Hess, CPA | Albuquerque, NM | Talk to me

If they did not file an 8832, the LLC would have to file Form 1065 each year. Profit or loss would flow to the owners in accordance with the LLC operating agreement (hopefully they made one!). In normal circumstances, the LLC would file the 1065 but owe no tax. The tax would be paid by the members on their own 1040s. Note that profit is also subject to self-employment tax on the member's 1040s.

ES payments would need to be calculated separately for each member.

Thanks for all the answers. You guys are wonderful.

If your client has not contacted any tax advisors before starting this business, it is most likely currently taxable as a partnership, which is Form 1065. If this a new company, however, your client should contact a tax advisor, and determine whether it would be more beneficial to elect to be treated as an S-Corporation. This should be done quickly, as there is a limited amount of time to do so.