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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22830
Experience:  Taxes, Immigration, Labor Relations
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I own an LLC and plan to sell shares or units of membership ...

Customer Question

I own an LLC and plan to sell shares or units of membership to raise money to expand the business. There are 2 other members in the LLC. My questions are: 1) Do I have to pay taxes on retained corporate earnings? 2) Do investors who buy units of membership pay taxes on their profits at their personal income tax rates? 3) Assuming the company is very profitable, what corporate entity should I treat the LLC as (or convert it to) to avoid the greatest amount of taxes (LLC, Parnership, S-corp, C-corp? 4) I plan to break the company into 5,000,000 units. Is this possible?
Submitted: 6 years ago.
Category: Tax
Expert:  Lev replied 6 years ago.

1) Do I have to pay taxes on retained corporate earnings? - LLC is not taxable entity - all income is passed through to members and will be taxed on individual tax returns.

2) Do investors who buy units of membership pay taxes on their profits at their personal income tax rates? - yes - that would be dividends and taxable for investors.

3) Assuming the company is very profitable, what corporate entity should I treat the LLC as (or convert it to) to avoid the greatest amount of taxes (LLC, Partnership, S-corp, C-corp? - you may convert to S-corp; If you do not plan distribution and plan to retain the income for business - C-corp would be preferable.

4) I plan to break the company into 5,000,000 units. Is this possible? - yes - but it would be important to structure the business to minimize the tax pressure.

Please ask for clarification if needed.

Customer: replied 6 years ago.
On your answer to #2, you use the word dividends. Dividends in my mind are taxed as capital gains (15%). If investors in the LLC are members, wouldn't the income passed to them be taxed as income and not cap gains?

On #3, you said I may convert to S-corp. I know that. I want to know if it's tax effective to do so.

#4 How do I structure the business to minimize tax pressure?

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