One Horrible Mistake You Can Make With Your LLC Ownership
Do you remember when Oprah Winfrey was giving stuff away on her show? I watched a promotional clip one day, where she was pointing to people and saying, “and YOU get a car, and YOU get a car.” But what I was thinking was, “and YOU get a tax bill, and YOU get a tax bill.”
If you’ve ever won the lottery, you know that you have to pay tax on your winnings. The same logic applies to when you win money in a casino (over a certain amount) and to when you win prizes on a game show. You’re taxed on the cash value of that prize.
Well, the same thing applies to ownership in an LLC or a Corporation. That’s why, if you want to give a family member, loved one or friend a piece of your business, you could also be giving them a tax bill.
That’s because the interest is looked at as taxable income by the IRS. For example, say you’ve got an LLC with a piece of real estate in it that’s worth about $260,000. You want to give a 25% share in the LLC to your brother – which is equivalent to $65,000. However, unless you make the transfer properly, you could also inadvertently give your brother a tax bill on that $65,000. The IRS will treat the value of his 25% share as taxable income to him, just as though he’d worked for it or earned it somehow.
The best time to give someone ownership in your LLC is in the early stages – ideally before any major assets have been transferred in, and before the LLC is really worth any money. And if you are bringing someone into your LLC later, talk with your tax preparer or attorney about how to gift them a share of the LLC. Or, if you don’t want to gift the ownership percentage make sure you plan for the tax bill with the new LLC owner, by making sure there is enough profit in the LLC to distribute to that person, to cover the tax bill when it comes due.
This surprise tax is just one reason why it’s a really good idea to get your tax advisors involved at the beginning of the formation of your LLC. With their help you can bring everyone into the LLC safely, and without triggering any unintentional tax consequences.
There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.
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