Newbie LLC tax question

5 Replies

Hi guys, newbie question here. I have been considering forming an LLC and I'm unsure which one to go by. I was told single person LLC is most popular and you could include your spouse. My wife works at home and makes minimal income through music tutoring (above $3K). How does taxation work in this case if we both form a single person LLC? Would it be the same rate as our gross income (W2), or is it a separate rate (i.e. if we split 50/50, she would be taxed at her personal bracket and I would be taxed at my bracket). How easy would be to transfer my 4 rental properties to the LLC? Thanks for all your help!

@Jesse Liu

Do you mean each of you want to create your own LLC?

From tax side, having LLC both SMLLC or MMLLC does not change your tax bracket.

I am sure you guys are filing married filing jointly now, so even after LLC, you would file the same.

LLC just acts as the bridge, the amount of income from rental or tutoring will have same effect with or without LLC.

If both of the LLCs for each of the business activity is SMLLC, there is not change in tax reporting. You would still report your rental in the personal schedule E and your wife’s activity is still reported on schedule C. 

The SMLLC is just a liability protection for your rental and Turtoring activities. They are distegarded for tax purpose.

Hopefully you were not thinking to combine rental and tutoring into one LLC and have you and wife as member of the LLC. That would be no no from legal standpoint and migh also require to file a partnership return.

@Jesse Liu Strongly questionable whether an LLC would be worth it for your wife's music business making $3k annually. Between the annual reports and filing fees, and also the overhead necessary to maintain separation of assets so the corporate veil isn't pierced, the cost-benefit just might not be there.

Might make the most financial sense (and most streamlined) to run her as a sole proprietor (Sch C) and carry appropriate and adequate insurance, which you should be doing anyway with an LLC. Best to speak with an attorney and CPA who can examine your individual facts and circumstances.

Thanks for the suggestions guys.  @Ashish Acharya she already has her LLC so you are right, it doesn't make sense to combine on a legal standpoint. It looks like it makes the most sense for me to create my own SMLLC then.

Some more questions that came up to mind...again, really appreciate any feedback I can get:

Would I get taxed extra if I form an LLC vs. self-proprietary? (i.e. self employment costs, etc.).

Would I be required to form a new business account and credit card? 

If I were pay myself, would I simply pull out money from the B account as I see fit, or reasonable pull-outs based on my own calculated profits after tax?

Originally posted by @Jesse Liu :

Thanks for the suggestions guys.  @Ashish Acharya she already has her LLC so you are right, it doesn't make sense to combine on a legal standpoint. It looks like it makes the most sense for me to create my own SMLLC then.

Some more questions that came up to mind...again, really appreciate any feedback I can get:

Would I get taxed extra if I form an LLC vs. self-proprietary? (i.e. self employment costs, etc.).

Would I be required to form a new business account and credit card? 

If I were pay myself, would I simply pull out money from the B account as I see fit, or reasonable pull-outs based on my own calculated profits after tax?

No, LLC is not going to change your tax in May manner.

Rental income are never subject to SE tax no matter how you run it through. Entity Vs no entity. 

The whole reason you are getting LLC is for the liability protection. If you do not follow some rules, you will not get desired protection. One of those rules is keeping a separate book for LLC. Thus creating new bank account and cards is required.

If not, your LLC might be just not worth it because if you are not following the rules to get desired protection, why create one when it does not provide any tax benefit.