I am in the process of deciding which type of taxation to choose for my LLC. Up until this point I was leaning towards Partnership taxation because that is what LLC For Dummies was recommending, but my brain is still having issues connecting the dots. I have found the following answer Simple Overview of LLC Pass Through Taxation useful but let's see if I manage to articulate my question(s).
- One of the advantages of an LLC is no double taxation - via pass-through taxation profits are not taxed at the company level, only at the individual level.
- With partnership taxation, the business's profits and losses get passed on to the owners, who report their share on personal tax returns. These profits and losses are called allocations
- When the company does not distribute profits to the members, the profit is called phantom income, and the members still have to pay taxes on it out their own pockets.
For the questions below, let's pretend that
The LLC has partnership structure with my 2 daughters and myself as members.
Each one of my daughters has 1% ownership, myself 98% ownership.
I am the manager of the company.
I make a profit of $10,000 say for example in my first 3 months
Questions as follows:
- Would the $10,000 be considered an allocation, and hence I would only have to pay taxes once during my personal income tax returns?
- Would my daughters being underage (way underage like 2 & 3) have to submit personal income tax return at the end of the year since they had a 1% allocation?
- Where do allocations go? to my personal bank account? or to the business bank account? If they go directly to my personal bank account then its mine and I can take the $ out and spend it whatever i want, but if it goes to my business bank account, can I take it out and spend it for my personal use?
If I was to pay myself a salary (because I am a manager) that is a distribution, then I would have to pay taxes on that salary is that right? That means I get taxed double. Is this a correct statement? If so I do not see the no double taxation advantage
What happens if I have an employee? Do I have to pay taxes 3 times? Once for ownership (profits-losses) included in my personal tax returns, twice for my own distribution (salary), and third for payroll?
I hope you are able to internalize my confusion. If the assumptions in my questions are correct then I am not sure what my billable rate will have to be in order to make the same money (or more) that I make out of my full-time job. Seems like in order to be able to provide benefits for yourself and pay and employee with benefits you need to be rolling in a pretty good chunk of money. Just to throw a number out there it feels that I have to charge $150 per hour...not exactly sure if that is pretty feasible.
I guess my final question will be:
- Is there a way to be taxed once and only once?