One of the best features of an LLC is its ability to benefit from pass-through taxation.
There are two big advantages to this.
First, you don’t have to worry about any adverse tax consequences when you move money in and out of an LLC.
For example, if you had a corporation, and this corporation filed a lien on your home, then any payments you made on the loan to your corporation (in order to create a paper trail that would help the lien hold up in court), may be taxable income for that corporation, even though you didn’t generate any profit for yourself from your activities. If your LLC filed a lien against your home, and you made interest payments to your LLC on the loan, you don’t have to worry about the consequences of any money that your LLC takes in, since you have not generated any income for yourself.
The second advantage is privacy.
Since an LLC can be set up to benefit from pass-through taxation, a single-member LLC may not be required to file any tax return. You only report income derived from your LLC on your 1040 return. If your LLC does not generate income, then you can effectively use your LLC without having to notify the IRS of any of your LLC’s activities, or even your ownership of the LLC. Please be aware that you are expected to file a K-1065 partnership return if you have a multi-member LLC, however. The last thing we need to address in this section is the franchise tax. Unlike corporations, most states do not have a franchise tax requirement for either domestic or registered foreign LLC’s.
There are a few exceptions to this rule.
The state of Texas, for example, has a franchise tax for LLC’s, but these LLC’s only have to file a return if they have more than $40,000 of net equity in assets (which can be stripped with a lien) or generate more than $150,000 a year in gross receipts. However, a California LLC has to pay a minimum annual franchise tax of $800. For personal asset protection, PF Shield typically forms LLC’s that are not required to pay a franchise tax in any state, because these LLC’s are not income-producing entities. Note that there is no franchise tax for either a New Mexico or Indiana LLC, which are the states of choice for forming anonymous LLC’s. However, if you have a New Mexico or Indiana LLC formed, and you use it in a way that requires it to be registered with your home state (such as using the LLC to run a for-profit business), then it is wise to double-check with a CPA to make sure that your LLC is not liable for a state franchise tax.