How to Reduce Taxes Using an LLC
- 1). Determine the identity and number of the members of the LLC. The LLC should have no more than 100 shareholders, and all shareholders should be either U.S. citizens or lawful permanent residents. The LLC should comply in all other respects with Internal Revenue Service (IRS) requirements for S corporations.
- 2). Choose the state in which the LLC will be formed. Since most states do not require the LLC to operate in the state in which it is formed, select the state with LLC laws most favorable to your company's intended line of business.
- 3). Select a name for your LLC, making sure to comply with state law restrictions on LLC names. Navigate to the website of the secretary of state's office of the state in which your LLC will be formed, and conduct a corporate name search to make sure that no one else is using your name.
- 4). Obtain a copy of the state government's LLC Articles of organization form (this is a short document). List the LLC's name, members, and other basic information about the LLC. File this document with the Secretary of State and pay the filing fee (usually less than a thousand dollars).
- 5). Draft an LLC operating agreement using a sample agreement as a reference (see Resources section). LLC operating agreements are similar to partnership agreements and function as the LLC's constitution. Include a provision forbidding the LLC from obtaining passive income that exceeds 25 percent of its gross receipts in a given tax year, so that the LLC will remain eligible for S-corporation tax treatment.
- 6). Complete IRS Form 2553 and submit it to the IRS. This will cause the IRS to treat the LLC as an S corporation, rendering it exempt from federal income tax and allowing members to be taxed only on income that is actually distributed to them.