Pass-through entities tax

[mmichi]

Hi,

Based on my research single-member LLCs in Delaware, Wyoming and New Mexico are considered as "Pass-through entities" as far as taxes are concerned.

Does this mean that I personally need to pay the tax on the income of the LLC for the year even if I do not pay myself even a single dollar from the LLC for the whole year?

Imaginary example with numbers:
Lets say a guy named Lenny forms a single-member LLC in Wyoming called "Henry LLC".
In year 2021 "Henry LLC" makes a profit of $200,000.
Lenny does not take out anything from "Henry LLC" the entire year, which means no salary, no expenses, no profit, nothing whatsoever.
Effectively exactly zero dollars were taken out of "Henry LLC" in any shape or form by Lenny.
All the profits of "Henry LLC" are still in Henry LLC.
For the sake of this example, Lenny does not take even a single dollar from Henry LLC for 10 years.

Question:
Does Lenny still have to pay the income tax on $200,000 profit of Henry LLC in 2021 or 2022 from his own personal pocket?

Reason I ask this:
I read on a webpage "most LLCs don’t pay corporate taxes since LLCs are pass-through entities. Meaning, in their default tax classification, LLCs don’t pay any corporate income taxes. The profits from the LLC “flow through” to the owner’s personal income tax return and are paid on the individual level (not at the corporate level)."

Source:
https://www.llcuniversity.com/wyoming-llc/why-you-shouldnt-form-an-llc-in-wyoming/

Thanks

 

[exprtadvisrdev]

Does this mean that I personally need to pay the tax on the income of the LLC for the year even if I do not pay myself even a single dollar from the LLC for the whole year?

Yes, you pay taxes as personal income for all the profits of the LLC. Also in some countries they can treat the LLC as a local business so it pays local business taxes too, it's better to talk to a local accountant about it first.

 

[mmichi]

Yes, you pay taxes as personal income for all the profits of the LLC. Also in some countries they can treat the LLC as a local business so it pays local business taxes too, it's better to talk to a local accountant about it first.

Thanks.
My understanding of "personal income tax" is a tax on "personal income". In the above example, Lenny did not have any personal income. How can he pay "personal income tax"?
Yes, there is a case to be made for "Henry LLC" to pay tax in all possible countries, but I do not think that would be "personal income tax" but rather "corporate tax".

Please correct me if I am wrong. Any sources stating that single-member would have to pay "personal income tax"(money going from human being's bank account) for the profits of the "corporation"(money in business entity's bank account) would be appreciated.

Thanks

 

[Sols]

Question:
Does Lenny still have to pay the income tax on $200,000 profit of Henry LLC in 2021 or 2022 from his own personal pocket?

Yes.

My understanding of "personal income tax" is a tax on "personal income". In the above example, Lenny did not have any personal income. How can he pay "personal income tax"?
Yes, there is a case to be made for "Henry LLC" to pay tax in all possible countries, but I do not think that would be "personal income tax" but rather "corporate tax".

Please correct me if I am wrong. Any sources stating that single-member would have to pay "personal income tax"(money going from human being's bank account) for the profits of the "corporation"(money in business entity's bank account) would be appreciated.

This depends on how the LLC is treated in the jurisdiction(s) where you are liable for tax. Some view LLCs as pass-through partnership (meaning only personal income) and some view them as corporations (meaning corporate tax, and if you paid yourself any income, personal income tax as well).

 

[mmichi]

Yes.


This depends on how the LLC is treated in the jurisdiction(s) where you are liable for tax. Some view LLCs as pass-through partnership (meaning only personal income) and some view them as corporations (meaning corporate tax, and if you paid yourself any income, personal income tax as well).

Thanks Sols. Do you happen to know which kind of corporation would definitely not be treated as a "pass-through entity"? Meaning to say which kind of corporation would ensure that the income is not treated as "personal income"?

Without going into details: Please kindly read the above question keeping in mind that the "person" does not want to avoid taxes but just does not want it to be classified as "personal income tax"