Pass-Through Taxation and LLCs

By Jennifer Reuting, author of Limited Liability Companies for Dummies™

Question:

In your book (Limited Liability Companies for Dummies) you talk about the advantage of forming your LLC, if you're an internet based business, in another state such as Nevada due to the "no personal income". I'm slightly confused about how this exactly works. As far as I understand it, LLCs are taxed as pass-through so any e-taxable profits are assigned to the owners as personal income. So if I live in Virginia but my LLC is formed in Nevada, how would this exactly work? Wouldn't the earnings from the LLC get passed through to me, living in VA, and then I have to pay the taxes in VA? If so, how exactly would the no taxes in Nevada help me save some money? Thank you for your time. I know it's kind of a long question but, as I'm sure you know, trying to figure out and decide what business to form, and where, is kind of nerve racking. Your book has been a great help, I'm just confused by this one point.

Answer:

Great question! You are right that the profits would pass on to you and you would end up paying Virginia taxes anyway... unless you have elected corporate taxation. Your LLC is not required to have pass-through taxation and by electing corporate taxation, you are allowed to keep your profits in the LLC. The profits you keep in the LLC will be taxed at the federal corporate tax rate. In addition, you will also be required to pay state taxes. However, by forming your LLC in a tax-free state (such as Nevada), you can eliminate any possibility of state taxes being assessed on the profits you keep in your company.

I hope this answers your question... If you need help in forming your LLC or electing a tax status, please don't hesitate to contact me or my associates at MyLLC.com!