An advantage to forming an LLC in Nevada is that there is no state
income tax, only federal income tax to consider. The LLC is particularly useful since, for tax purposes, it has a lot of flexibility. Members can choose how they wish to be taxed.
When a single member is forming an LLC in Nevada, the member can choose to be treated as a sole proprietor for income tax purposes. This is known as a disregarded entity. The LLC retains its ability to protect the member from liability, but for tax purposes the business is treated as though the member were a sole proprietor.
Choosing to be Taxed as a Partnership
An LLC with multiple members can choose to be taxed as a partnership. A partnership means that each member will be taxed on his/her share of partnership income (or loss) whether or not the member received any distribution.
Choosing to be Taxed as a Corporation
Members forming an LLC in Nevada can also choose to be taxed as a corporation. This may be useful for a variety of reasons. Firstly, the income tax rate on corporations for the first $75,000 of income is probably less than that for the members, individually. For the first $50,000, the corporate tax rate is 15%. For corporate income up to $75,000 the federal income tax is $7,500 + 25%. This means the members could potentially keep some retained earnings in the corporation at a tax rate lower than their individual tax rates, and the remainder could be distributed to the members as income, bonus, or dividend. Remember, though, that dividends paid to members are taxable as income to the member but not deductible by the corporation (the double taxation dilemma).
Another advantage to choosing taxation as a corporation may be to allow members to save self-employment taxes, or to establish tax-free fringe benefits.
How a Lawyer Can Help
It is important to consult with your attorney when forming an LLC in Nevada to understand the tax ramifications, so call the Sutton Law Center with your LLC formation questions.