LLCs questions...*roll eyes*

3 Replies

Soooooooo silly question, but I thought I'd ask.The general concept of LLCs I understand, but what I'm struggling with is at which point would you want to classify your LLC as a Corp? The personal tax rate even at the high end of the tax table is higher than highest rate at the corporate level.

So say your taxable yearly income from your 9-5 is 50K + say 5K from your rental properties...the 5K will be "pass through" as you'll complete the 1040C form ...but say rather than 5K is 50K, is it worth classifying your LLC as a corp. in this case because you won't want to pass that 50K as personal income to avoid the personal income tax...?

I guess my question is at which point do you say...I no longer want to pay personal income tax on profits from my rentals? Quite honestly now that I write this out, I don't see the huge advantage of the LLC to begin with even if it is 5K - - why would I wan to pay personal income tax on those 5 grand...am I missing something...( i just got my self confused...smh)

hope this makes sense.

The corp comes into play when earning 'active' income.  If you are flipping, consulting, managing, wholesaling, etc.

RE is passive, so no SE tax.  It's the SE tax you are trying to get help with inside a corp.

The issue is not whether personal rate or corporate tax rate is higher, but what is the TOTAL tax rate on the income? The 5k income from an LLC is taxed once at the personal rate. The 5k from the corporation is taxed once at the corporate tax rate and then taxed AGAIN when you take the money out of the corporation as salary/dividends or whatever. That is why corporations are referred to as having double taxation. So the question is what will the total combined tax rate be on income. With the traditionally favored tax rates on capital gains, the total tax rate is usually lower with pass through entities like an LLC on investing activities, but might not be as favorable for active business activities.

@Daniel Weaver

Makes sense on the double taxation.  Make perfect sense, and appreciate the feedback.

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