I'm considering an LLC for my subto business. For tax purposes, would it be better to have a two person LLC or a one person. What would the differences be.
Thanks in advance!
With a 1 person LLC you use your own SSN as the tax ID. With more then one person you need to request a tax ID for the LLC and then file returns for that tax ID.
There actually are many differences. A one member LLC is a DRE (disregarded entity) or a direct flow through of expenses and income. A two member LLC is generally a partnership. With a partnership you can, within certain limits (economic performance issues) manipulate the amount each partner receives in losses, income, special allocations, etc. That is, LLC members can split profits/losses in any way they choose.
For income tax and SE tax purposes, "members" of an LLC taxed as a partnership are equivalent to "partners" of a partnership. If an LLC member is treated like a GP, the LLC'S distributive share of net ordinary loss can reduce the member's SE income from another source. If an LLC member is treated like an LP, the LLC's ordinary loss allocation does not have SE tax consequences. Thus, an LLC member must plan his or her affiliation with the LLC so as to be treated as a GP, to be able to deduct LLC ordinary business losses against other SE income.
If the property is owned by a DRE LLC the owner may defer income tax on a sale by means of section 1031 exchange. This currently can't be done with respect to interests in a partnership LLC, though that may change when Revenue Procedure 2004-51 is issued.
With a two member LLC you are required to file a partnership return (Form 1065), however with a DRE LLC no additional tax return is required as this is a direct flow though to your 1040 forms. I could go on and on about the differences between these two entity structures but I would suggest you discuss this with your CPA.
Additional comments discussing the advantages and disadvantages of single member limited liability companies (SMLLC):
Single member LLCs or SMLLC (or a disregarded entity (DRE)) have major advantages over sole proprietors or solely owned C or S corps. Tax attributes flow directly to the schedule C or Schedule E unlike the separate federal and state tax return requirements of a soley owned C or S corp.
Furthermore unlike C corps, loans and transactions between a C corporation and shareholder are disregarded in a SMLLC. Also like kind exchange treatment (1031) is available for a SMLLC or DRE.
However there is one drawback to using a SMLLC. This problem was highlighted in the Albright case and deals with asset protection. Generally it was thought that a creditor could not require the sale of LLC assets.
Prior to the 2003 Albright case a creditor had only the rights of an assignment or of a charging order. This charging order or garnishment directs the LLC to make distributions to the creditor that would have been made to a member or partner. Thus prior to Albright a creditor could not exercise management control, force a distribution, require redemption of a members interest, or seize any specific property of the LLC.
In the Albright case, the US Colorado Bankruptcy court allowed the SMLLC owner’s creditors to take control of the LLC and its assets. The Court focused on the primary purpose of a charging order, which is to protect other members of a partnership or LLC from sharing ownership with a member they did not select. The Court in this case found that unanimous consent is unnecessary in a SMLCC, because there are no other members to protect. Thus, the goal of a charging order, which is to protect other members, was irrelevant here. By filing for bankruptcy, the debtor effectively assigned the entire membership interest in the LLC to the bankruptcy court.
A different situation arises, however, when an LLC includes a passive member and one controlling member. If the controlling member files for bankruptcy, a passive member's non-consent will bar the trustee from assuming the debtor's membership interest. This is the case even if the passive member has a minimal interest and management role in the LLC. The trustee would simply be entitled to a charging order, which would provide the bankruptcy with the normal share of distributions attributed to the debtor-member. However, the Court warned that this does not create an asset shelter for devious debtors. The debtor will be subject to bankruptcy avoidance provisions and fraudulent transfer laws if they intend to hinder or defraud creditors through a multi-member LLC.
Quote:Only thing to add is that if you are in a joint property state (like I am), a 2 member LLC with husband and wife is also a DRE, treated as 1 owner.
c5hardtop,
The IRS tax treatment of a husband-wife member LLC as a single member LLC only applies in community property states.
There are currently nine states which offer community property status. These states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
North Carolina is not on the list. I think you are confusing joint tenancy in the entirety with community property.
Consider using other enities(LLCs or FLPs) as your members to a multi-member LLC. This adds another layer of asset protection. In fact, you could be the sole owner of a multi-member LLC and not be personally listed as a member. Rember, members need not be owners. Members simply have an interest in the company, but that need not be ownership. It can be an entirely non-economic interest. Nevada and Delaware don't collect ownership information when you form an LLC and it need not ever be public information. Ownership in these states is recorded only as an internal company document, if you choose, not with the State.
No difference in your taxes.
There may be legal differences which are probably already discussed in the legal forum.
thank you
With a 1 person LLC you use your own SSN as the tax ID. With more then one person you need to request a tax ID for the LLC and then file returns for that tax ID.
John
[addsig]
Hey thanks for the info. I thought there was a difference.
Whether your LLC is a disregarded entity under your SSN, or a partnership with its own tax ID number, the tax effect to you is the same.
No difference in your taxes.
There actually are many differences. A one member LLC is a DRE (disregarded entity) or a direct flow through of expenses and income. A two member LLC is generally a partnership. With a partnership you can, within certain limits (economic performance issues) manipulate the amount each partner receives in losses, income, special allocations, etc. That is, LLC members can split profits/losses in any way they choose.
For income tax and SE tax purposes, "members" of an LLC taxed as a partnership are equivalent to "partners" of a partnership. If an LLC member is treated like a GP, the LLC'S distributive share of net ordinary loss can reduce the member's SE income from another source. If an LLC member is treated like an LP, the LLC's ordinary loss allocation does not have SE tax consequences. Thus, an LLC member must plan his or her affiliation with the LLC so as to be treated as a GP, to be able to deduct LLC ordinary business losses against other SE income.
If the property is owned by a DRE LLC the owner may defer income tax on a sale by means of section 1031 exchange. This currently can't be done with respect to interests in a partnership LLC, though that may change when Revenue Procedure 2004-51 is issued.
With a two member LLC you are required to file a partnership return (Form 1065), however with a DRE LLC no additional tax return is required as this is a direct flow though to your 1040 forms. I could go on and on about the differences between these two entity structures but I would suggest you discuss this with your CPA.
Additional comments discussing the advantages and disadvantages of single member limited liability companies (SMLLC):
Single member LLCs or SMLLC (or a disregarded entity (DRE)) have major advantages over sole proprietors or solely owned C or S corps. Tax attributes flow directly to the schedule C or Schedule E unlike the separate federal and state tax return requirements of a soley owned C or S corp.
Furthermore unlike C corps, loans and transactions between a C corporation and shareholder are disregarded in a SMLLC. Also like kind exchange treatment (1031) is available for a SMLLC or DRE.
However there is one drawback to using a SMLLC. This problem was highlighted in the Albright case and deals with asset protection. Generally it was thought that a creditor could not require the sale of LLC assets.
Prior to the 2003 Albright case a creditor had only the rights of an assignment or of a charging order. This charging order or garnishment directs the LLC to make distributions to the creditor that would have been made to a member or partner. Thus prior to Albright a creditor could not exercise management control, force a distribution, require redemption of a members interest, or seize any specific property of the LLC.
In the Albright case, the US Colorado Bankruptcy court allowed the SMLLC owner’s creditors to take control of the LLC and its assets. The Court focused on the primary purpose of a charging order, which is to protect other members of a partnership or LLC from sharing ownership with a member they did not select. The Court in this case found that unanimous consent is unnecessary in a SMLCC, because there are no other members to protect. Thus, the goal of a charging order, which is to protect other members, was irrelevant here. By filing for bankruptcy, the debtor effectively assigned the entire membership interest in the LLC to the bankruptcy court.
A different situation arises, however, when an LLC includes a passive member and one controlling member. If the controlling member files for bankruptcy, a passive member's non-consent will bar the trustee from assuming the debtor's membership interest. This is the case even if the passive member has a minimal interest and management role in the LLC. The trustee would simply be entitled to a charging order, which would provide the bankruptcy with the normal share of distributions attributed to the debtor-member. However, the Court warned that this does not create an asset shelter for devious debtors. The debtor will be subject to bankruptcy avoidance provisions and fraudulent transfer laws if they intend to hinder or defraud creditors through a multi-member LLC.
Only thing to add is that if you are in a joint property state (like I am), a 2 member LLC with husband and wife is also a DRE, treated as 1 owner.
Quote:Only thing to add is that if you are in a joint property state (like I am), a 2 member LLC with husband and wife is also a DRE, treated as 1 owner.
c5hardtop,
The IRS tax treatment of a husband-wife member LLC as a single member LLC only applies in community property states.
There are currently nine states which offer community property status. These states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
North Carolina is not on the list. I think you are confusing joint tenancy in the entirety with community property.
Consider using other enities(LLCs or FLPs) as your members to a multi-member LLC. This adds another layer of asset protection. In fact, you could be the sole owner of a multi-member LLC and not be personally listed as a member. Rember, members need not be owners. Members simply have an interest in the company, but that need not be ownership. It can be an entirely non-economic interest. Nevada and Delaware don't collect ownership information when you form an LLC and it need not ever be public information. Ownership in these states is recorded only as an internal company document, if you choose, not with the State.