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Thanks in advance for any help answering this question. I have already set up a multi-member LLC in New York State. I attempted to register for an EIN as an LLC but was told by the IRS that I would be qualified as a partnership for tax purposes because I had more than one member. Does anyone know the pluses and minuses to being classified as a partnership and whether or not I should elect to be considered a S-Corp or another entity for tax purposes? Thanks! |
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One of the smartest things I did as a small biz owner was hire an accountant that explained all of the options I had for LLC, etc. to help me make right decision and get proper paperwork submitted, and he now does my biz and personal taxes for under $500/year. As you know laws are different in every state so it's tough to know what will work best for you. Look for an accountant that specializes in small businesses so their experience and cost is right for you. |
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LLC's are kind of odd. You can select how you want them taxed. A multi-member LLC can be taxed as a corporation or as a partnership. This is entirely up to the members. You should still get an EIN for the LLC since you will want to report revenue against it as well as sales taxes. I am kind of shocked that the IRS would say that. If you are a multi-member LLC, taxed as a partnership, you will generate Schedule K-1's for your members. These profits or losses will be passed through to your partners as a percentage of what they own and they pay personal income tax on it. The benefits of a partnership status is that you don't have to pay corporate tax -- you just pay personal tax. If you are taxed as a corporation, you pay both corporate and personal taxes if you take money out of the LLC. It really does depend on when you distribute the profits or losses. There are reasons, which an accountant will know, to switch. Usually it has to do with minimum taxes and how much revenue or profit you make. |
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I am confused about why the IRS would tell you that you would be treated as a partnership rather than an LLC. (I don't think it really matters early on in any case, as I think you will get the same tax treatment. (pass-though to members)) However, it is best to get it straightened out. I would call the IRS again and get a clarification on the issue. As for "electing S corp status" - that is only a choice when creating a corporation. You will have to either create a new entity or convert to a corp, then elect S status. I am not familiar with the process of migrating from LLC or LLP to a corporation. I choose S corps because I think they are a lot cleaner and easier to manage. I also prefer the flexibility of having different income (dividends for example). As another posted suggested - talk to an attorney and/or an accountant. |
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