IRS — AUDITS AND ASSESSMENTS — WHICH ENTITY TO USE TO ORGANIZE THE FORMATION OF AN LLC

The three letters “IRS” strike fear in a lot of people, and for good reason. Nobody likes to be audited by the IRS. An audit is time-consuming and nerve-racking. An audit can also be expensive, with not only professional fees, but potentially having to pay a deficiency in taxes (plus interest and maybe penalties).

A primary cause for drawing an IRS audit is business deductions that look out of the ordinary. Even if legitimate, you still have to provide documentation, etc. So why would you want to draw attention to yourself? Yet I see many taxpayers do exactly that when they form a single member limited liability company (“LLC”).

If you are starting a new business, and select an LLC as your business entity (which I frequently suggest is the best entity), then you need a multiple owner LLC. If you have a business partner, then the LLC will be a multiple member LLC. But if you are starting a business by yourself, then make a spouse or family member a 1% owner.

The advantage of a multiple member LLC versus a single member LLC is in how the business deductions are reported. In a multiple member LLC, the business deductions are reported on the LLC’s business tax return, and only the profit amount is reported on a single line your personal return (Form 1040). On the other hand, a single member LLC is treated as a sole proprietorship for tax purposes. This means the LLC does not file a business tax return. Rather, all the business deductions are reported on your personal Form 1040. At The Libby Law Firm our experts will review your business plan and assist in the formation of the entity that best suits your business needs.

Business deductions on a business tax return look normal. A lot of business deductions on a personal Form 1040 raise red flags. So find someone to be a 1% owner, and stay under the IRS radar.