LLC Partnership

LLC Partnership

What are the tax implications of having an LLC partnership in State X?


Let's first clarify what the entities are you are asking about and how they relate. Simplifying the issues might help.

An "LLC" is a limited liability company. It is an entity organized under state law that can provide limited liability to all of its members and managers. Limited liability means (if successful) that the owners (called members) and the managers (those who operate the company, assuming managers are appointed and that this is not simply left to the owners) should not generally be able to be sued personally for matters pertaining to the LLC.

An LLC can have one member and be treated for federal income tax purposes as if it does not exist (called a "disregarded entity"). That status won't adversely affect the limited liability that it offers. There are some exceptions under IRS procedures (called check the box regulations) in which you can choose a different tax treatment, but that is beyond your question.

Most, but not all, LLCs with 2 or more members are taxed as if they are partnerships. In very simple terms income, deductions, gains and losses of a partnership flow through (pass through) to and are reported by their owners (members in the case of an LLC, partners in the case of a partnership).

Now for state tax purposes, many states follow the federal system described above but apply their own state tax rates. Many other states have nuances or even significant differences as to how the state taxes an LLC in contrast to how the federal government taxes an LLC. A few states may treat an LLC similar to a corporation and not like a partnership for state tax purposes. Some states assess a franchise or other tax against LLCs. The rules vary rather considerably from state to state.

If you have multi-state operations the above complexities become more difficult as you will have to address the rules of several states, and potentially even more complex, the manner in which you allocate LLC profits between various states. This might result in tax credits in some states for income tax paid to other states. However, in many cases taxpayers can get whipsawed because the credit mechanisms are not perfect and you could pay substantially more tax as a result of multi-state tax exposure.

Yet another layer of complexity relates to the myriad of issues and details in the actual federal (and potentially state) partnership income taxation rules. These can be complex and too often not intuitive.

While we cannot address state specific issues (you need to discuss these with a tax accountant and corporate/business attorney in your state) we can provide you with some general information.

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