YES – People do make mistakes in forming LLC’s. Even lawyers do!
An LLC is a Limited Liability COMPANY. Most people think it stands for Limited Liability Corporation.
As a “company” it has no designation for taxation purposes until you tell the IRS what that is. An LLC can be taxed as:
- A Sole Proprietor
- A Corporation
- A Partnership
- An S Corporation
The biggest mistake on the part of lawyers and even accountants is they forget to ELECT a taxing component.
Thus, it defaults to being taxed as a sole proprietor, commonly the highest tax rate! This does not go over very well when tax guys like me get a surprise at tax time thinking someone formed an LLC to be an S Corp and the proper election was not made.
You must file form 8832 to make the proper taxation election for an LLC. In addition, this form must be filed along with the first year tax return.
When forming an LLC, it is best to not only consult an attorney, but also your tax person.
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