Flexible Tax Choices

LLCs are typically taxed as partnerships but they may also decide to be taxed as C or S corporations—or they can be structured as disregarded entities, in which case they are completely ignored for taxation. This capability creates unique financial planning opportunities not available through other entities.

Examples of this feature include:

• A single member LLC that is taxed as a disregarded entity can own S corporation stock, although neither partnerships nor corporations can. This enables us to provide a layer of protection to prevent S corporation stock from being seized if the LLC's owner has claims brought against them and loses in court.
• An international LLC may elect to be treated as a disregarded entity, in which case a business owner can benefit from the advantages of international Asset Protection while having fewer reporting requirements as compared to international trusts. Additionally, a disregarded international LLC avoids many complex rules and tax traps that frequently arise in other international structures.
• If a business owner uses a limited partnership or corporation to hold their personal residence it will be disqualified from the IRS exemption regarding capital gains when the home is sold. This powerful exemption enables a homeowner to sell their appreciated personal residence free of capital gains tax (up to $250,000 for a single person and $500,000 for a married couple). Assuming a 15% capital gains tax rate, this LLC feature can create tax savings of $50,000 to $100,000. In order to qualify for these exemptions two criteria that must be met: 1) one or both spouses must have owned the home for at least two out of the five years preceding the sale and 2) the house must be the primary residence during those years. If a limited partnership or corporation owns the home, the capital gains tax savings is not applicable; however, a disregarded entity LLC can hold the residence and still qualify for the exemption, since its activities are treated as those of its owner. Some states require an LLC to have a business purpose, in which case the homeowner should pay rent to the LLC that owns the home, which will ensure that the LLC will be recognized as a separate legal entity.
• A disregarded entity LLC's income must be reported on the tax return of its owner (on Form 1040 Schedule C, if the owner is a person). However, a LLC that owns non-income producing property and does not generate profit from other activities will not need to report income (for federal and most state tax purposes) making the LLC anonymous in the state where it is, which is a powerful privacy tool. So, if someone used a disregarded entity LLC to buy their personal residence, the transaction can be made without disclosing the LLC owner. Even if the owner pays rent to the LLC, because the LLC is disregarded from its owner's activities for tax purposes, the LLC has no gain and the owner would not be required to list the LLC on any federal tax return.

It could be viewed that a grantor trust (detailed in the next section) is also ignored for tax purposes and therefore is highly desirable for protecting a home from creditors. However, most states do not allow a grantor trust to provide Asset Protection if the grantor (the being the individual that puts assets into a trust) continues to use the property. Accordingly, a disregarded entity LLC is a unique type of structure that provides limited liability in a wide range of situations and is also ignored for tax purposes.

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