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Copyright 2009-
I am leaving all the profits of my LLC in the business to help grow the business. Do I have to pay taxes on these profits, even though I haven't distributed any of the profits to myself this year? – V.M.
This is a very common question among business owners using the LLC business entity type. The short answer is that unless you have elected to have your LLC taxed as a corporation (which it sounds like you have not), you indeed do need to report the full amount of profits of your LLC on your personal taxes and will therefore owe income taxes on the profits. You may also be required to file quarterly estimated tax payments, depending on your individual situation.
Many LLCs choose to distribute enough cash to each member to cover their personal income tax obligation due to the profits of the LLC, and the remainder stay in the business for its use. Your accountant will help you determine the correct amount of profit to report as well as the incremental taxes due based on the profits reported.
It is very important that you maintain good financial records for your LLC, even if you are the only member of the LLC. Every purchase made by the business and every business expense incurred should be clearly documented and recorded in your accounting system. Also, your initial and subsequent contributions to the LLC (your initial investment as well as any money you have contributed to the business along the way) must be clearly documented and included in your accounting system, since you do not have to pay taxes on these funds again.
In a very simplified example, if your initial contribution to the LLC was $10,000, you added $2,500 during the first year. Your first year sales were $20,000 and your expenses were $15,000. Your bank account balance is now $17,500, however, you only owe taxes on the $5,000 in profits (sales less expenses). The next year starts over and the $5,000 from this year counts as an additional contribution.
Be sure you check with your attorney and accountant for your specific situation. Read more articles on small business financial management here.