When you formed your LLC, you created a new “entity” which is subject to taxes at the State and Federal level. Texas doesn’t have a state income tax but keep in mind that businesses are subject to a privilege tax called the “franchise tax”. Your business will have to have revenue over $1.1M before you have to pay any tax, but you MUST file a franchise tax return yearly even if you owe no tax. Not doing so will result in the State forfeiting (closing) your LLC. Remember that your TREC LLC license will need to be renewed every 2 years and you must provide them proof that your LLC doesn’t have any franchise tax issues. Go here for more info on the franchise tax.
At the Federal level, the IRS considers LLCs to be “disregarded” entities when there’s only one member (owner). This means you’re not required to file anything in the name of the business and all of your business-related income, expenses, etc. will go on your personal return. In other words, you’re taxed like a sole proprietor.
If you have two or more members (owners) in your LLC, the IRS will classify your business as a partnership by default. And with that classification, the IRS expects you to file a 1065 partnership return each year by March 15. If you fail to file the return, they will send you a letter with a fine that you have to pay. A partnership return will have your business income, most business deductions, asset depreciation, etc. on the return and then Schedule K-1 forms for each partner that shows things like the amount of income that partner was paid. The info from a Schedule K-1 will then be entered on your personal tax return. You will also need to maintain “capital accounts” for each partner which shows the amount each partner contributed in the beginning to start the business along with amounts credited and debited each year for things like taking money out of the business, adding money to the business, etc.
The great thing about LLCs is that the IRS allows you to reclassify them as a different type of entity for tax purposes. There’s no recommendation one way or other and depends on what’s most beneficial for you, your co-owners, and your business.
We’re just providing some very basic tax info so that you’re aware. This is a very complex subject and what we’ve said here only scratches the surface so be sure to do your research and talk to tax professionals!
NOTE: We cannot provide tax advice. Unless you’re very familiar with accounting, tax laws, business taxation, etc., we highly recommend working with a CPA to make sure your taxes are filed properly.
