1. What does a “pass-through entity” mean?

A business that does not pay income taxes on its own is a pass-through entity. The income, losses, credits, and deductions from the business “pass-through” to each of the owner’s tax returns. At that point, the profits are taxed according to each owner’s individual income tax rate. Pass-through entities include Sole proprietorships, general partnerships, limited partnerships, limited liability companies, limited liability partnerships, and S Corporations. Limited liability companies that elect to be taxed as a corporation, and Incorporated Companies (Corporations) are not pass-through entities.

Choosing to operate a pass-through business or incorporating? There’s much to consider! If you are starting a business, you should research the various entity types carefully and speak with CPAs, legal advisors, and tax professionals for expert guidance before deciding on a business type.

2. What are the Tax differences between an LLC and an S Corp?

The IRS does not have a business classification for LLCs. The IRS only recognizes “C corporations, S corporations, partnerships, and sole proprietorships.

Therefore, the IRS treats LLCs as follows:

• For single-member LLCs the IRS taxes as a sole proprietorship.
• Multimember LLCs the IRS tax as a partnership

Advantages of an LLC:

• The flexibility in the management of day-to-day operations, there is less recordkeeping and fewer reporting obligations than those required of an S corp.
• The structure combines the benefits of limited liabilities and pass-through taxation, which is similar to an S corporation.
• The business structure is less restrictive than an S Corp
• The business is easy to set up and maintain.

Advantages of an S Corp:

• An LLC can elect to be taxed as an S Corp
• Different from an LLC in the way, owners pay self-employment taxes (Social Security and Medicare) as an S corp.
• For single-member LLC taxed as an S corporation, the member will be considered an employee
• A reasonable salary must be paid to the owner (employee)
• Owner taxes are paid only on their salary; the remaining profits of the S Corp are not subject to taxes.
• The LLC reports the employee salary as a business expense. The owner/employee will report the salary received and any remaining profit from the business on their tax return.

Note that not every business qualifies to elect to be taxed by the IRS as an S corporation. A single-member LLC will usually qualify to be taxed as an S corp. Some cases would cause the election to be denied for example: the limited liability company is a foreign business, the owner is a nonresident alien, or the business owner is considered a partnership or corporation.

3. I have been told I could lose my Limited Liability status is that true?

Yes, a court could rule that your LLC does not exist and find you are doing business as an individual. In this case, you are personally responsible for your acts. To avoid this there are some steps you and your co-owners should take:

• Act legally, honestly, and fairly. Do not misrepresent material facts or conceal the state of your finances from creditors, vendors, or others.
• Have a formal written operating agreement.
• Invest enough cash into your business so you can meet expenses and liabilities
• Keep Business and personal finances separate. Obtain a federal employer identification number, and set up a “Business-only” checking account. Treat the LLC as a separate entity and not just part of your personal affairs.
• Obtain and maintain a liability insurance policy

Remember you can be held personally responsible if you:

• Personally guarantee a bank loan for the LLC and default.
• Fail to deposit taxes withheld from your LLC employee wages
• Do something illegal, or fraudulent that harms the company or someone else.
• Personally, and directly injure someone

If you have concerns about a specific activity or concern you should seek legal advice.

4. Who has to file Form 1065 with the IRS?

IRS Form 1065 is an information return that’s used to report partnership income and losses for the year. Partnerships do not pay taxes directly but instead pass tax liability onto the partners; IRS Form 1065 is filed for informational purposes only.

If your business is structured as a partnership, including general partnerships, limited partnerships, limited liability Companies (LLCs), and limited liability partnerships you are required to file IRS Form 1065.