4.
Re: need help starting a cleaning service Jun 9, 2008 8:21 PM
in response to:
sabrina
The IRS will automatically treat your two-member LLC as a partnership unless an election is made for it to be treated as a corporation (you do that by filing Form 8832). Aside from any state implications that might exist (your profile doesn't say where you're located), this election is purely for federal income tax purposes.
So should you make that election (and why should you care)? Well, understand that I'm not an accountant (hopefully, a CPA will post something to either back up or shoot down what I'm about to say), but I'd say, yes -- you should make the election and here's why you care . . .
If you're taxed as a partnership, all company profits are distributed to you and your partner -- so you each pay personal income tax on those profits at whatever rate applies to your level of income. For example, if your share of the profit was $40K, it would put you in a 25% tax bracket. If you were taxed as a corporation, however, you could probably manage your finances so that you'd never pay more than 15 percent in taxes ($40K profit would be taxed at 15 percent). So in that case, you'd pay $4,000 less in taxes as a corporation by comparison. Of course, the tradeoff is that you'd have to prepare and file a somewhat more complex corporate tax return (Form 1120). Does all that make sense?
Again, please run my logic by an accountant (especially if one doesn't post something here).
