LLCs

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    Pierre Antounian (Edited )

    Hi Claudia, I think they are both implying the same thing. Unlike a Subchapter C Corporation where both the C Corp files and pays federal taxes, and profits are passed through as dividends to stockholders, who pay double taxation on individual returns.
    Paraphrasing from AHPP 15th Edition page 202.
    I’m learning legal business entities for the first time and this is to date my best understanding.

    So C Corp - Stockholders are viewed as an aggregate part of the business, tied at the hips so to speak, while LLC’s and their Members are separate entities.
    I would like to hear other peoples take on this. Hope this helped a bit.

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    Michael Ermann

    If Ballast says that LLCs are not taxed, Ballast has an error. Governments absolutely tax LLCs, though there are ways that what is earned in a business can be treated like capital gains instead of income, and therefore taxed at a lower effective rate (this last fact is not germane to the exam). From an ARE point-of-view, the advantage of an LLC over a sole proprietorship rests in the following scenario: If the building you design burns down, killing people inside, you are much less likely to lose your personal house/personal car/personal retirement savings if your architecture business was first registered as an LLC. Doing so separates your personal finances from your business finances, so one can go broke without affecting the other. As someone else wrote on this thread, the advantage of registering as an LLC instead of filing as a C-corporation, is that what is earned from an LLC is taxed only once but what is earned as a C-corporation is double-taxed. C-corporations are generally used for large companies with many shareholders. . . think Pepsi, Exxon Mobile, and Facebook. I made an animated video to help explain this and posted it here. – Michael Ermann, Amber Book

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    Haytham Abdelrahman Abdelall

    Hi Claudia,

    Separate entity in the eyes of the federal government, so the business itself is not taxed” I think because LLCs will be taxed once , won’t pay federal taxes; instead income and losses are passed through individual tax return. In other meaning owners of LLC are taxed on the income allocated to them, not on any profit distributed to them (like S corp – double taxation)

    Source: Law for Architect, page # 109

    “LLC is a separate entity from the Members of the LLC”  I think it means member is liable for their own negligence and liable for business debt as oppose to General / Limited Partnership.

    Source: AHPP, page # 202

     

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    Claudia Rodriguez

    **Revising my statement from above**

    I meant to say that the Ballast text says that, "An LLC is NOT a separate entity in the eyes of the federal government, so the business itself is not taxed." Hence my question about whether the two statements were contradictory(since Plural sight videos say that an LLC is a separate entity from the Members of the LLC).

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    shoshana saul

    Claudia,

    I think you are getting confusing by the wording, understandably so. LLCs are like a fusion of corporations and sole proprietorships/partnerships. So when Ballast states that an LLC is NOT a separate entity, this statement is referring to federal finances (the business and members are not taxed separately. The money flows through to the members). When the AHPP states an LLC IS a separate entity, this statement is referring to liability (the personal assets of members are not at risk like they would be if the business were not a separate entity). Hope this helps!  

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    Diondria Bingham

    So what is the difference between a LLC and the S Corp. Aren't both avoiding the double tax?

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    Michael Ermann

    LLC vs S-Corporation?

    Good question, Diondria. LLCs and S-Corporations are similar:

    Each protects your personal assets, so if the building you design burns down, the victims will have a difficult time winning your children’s college fund when they sue you in court. Sole proprietorships, or just starting a business without filing with the state as a business entity. . . those paths don’t offer this protection.

    Neither LLCs or S-corporations are double-taxed the way that C-corporations are. GE, Microsoft, Coca-Cola and other large entities file as C-corporations because once a company gets big enough, it is almost required to become a C-corp. If your C-corporation makes a profit this year, the government first taxes it at the corporate level. Then if it uses that profit to pay dividends to its owners (shareholders), those shareholders are taxed again at the individual level.

    So what’s the difference between an LLC and an S-corporatoin? S-corporations take a bit more effort (though not much) to set up and have a few more rules (though not many more). . . The meaningful difference is that if you have a very profitable year, S-corporations can be taxed at a lower rate than LLCs. I’ll explain. The federal government taxes income at a higher rate than it taxes investments, so someone who makes the same amount of money as you do this year, but makes it by earning bank account interest and stock dividends will pay a meaningfully lower rate than you, as a working person, will. Remember that when you read the next paragraph.

    If at the end of the year, an LLC has $500,000 left over in profit, the owner will be taxed as if they earned that $500,000 working. This means a higher base rate, plus more in FICA (social security, Medicare). If however the owner had filed as an S-corp, they are required to pay themselves a “reasonable” salary, tied to industry standards, but their profit above that salary can be taxed as if they were an investor in their own company, and their company paid them a dividend for their shares of stock. So, maybe the first $100,000 is taxed as a reasonable salary for the principal of a small architecture firm, but the next $400,000 in a S-corporation can be defined as a “distribution,” and taxed same way that any other investment would be taxed at a lower rate than salary earnings.

    You may have already seen this, but if you haven’t . . . This is free content on this topic from the Amber Book I posted on YouTube.

    https://www.youtube.com/watch?v=5U1HEBv4aUE&list=PLRqQUel8W0R6t0eDPnaCi1sPt4ao9CXQA&index=21

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