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I have a business that is in it's 2nd year and has now made $400ish. I have the money just sitting in the business bank account. I do have a business partner. A couple of questions?

  • If we leave the money in there will it get taxed as business income?
  • Should we try to spend the money on the business so it will be an expense and not be taxed?
  • If we just write ourselves checks and split the money as income, would the business AND us as individuals be taxed or just us as individuals?

Thanks for any/all help. Any other pointers would be great too! :D

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  • what country are you from?
    – littleadv
    Aug 24 '15 at 4:06
  • fyi, we didn't show the business or income on our taxes last year because the business had only made like $49. Just putting that info in there as well. Aug 24 '15 at 4:07
  • This is in the USA. Aug 24 '15 at 4:07
  • When you say "business" - what exactly do you mean? What kind of entity you're talking about here?
    – littleadv
    Aug 24 '15 at 6:15
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Through your question and then clarification through the comments, it looks like you have a U.S. LLC with at least two members. If you did not elect some other tax treatment, your LLC will be treated as a partnership by the IRS. The partnership should file a tax return on Form 1065. Then each partner will get a Schedule K-1 from the partnership, which the partner should use to include their respective shares of the partnership income and expenses on their personal Forms 1040.

You can also elect to be taxed as an S-Corp or a C-Corp instead of a partnership, but that requires you to file a form explicitly making such election. If you go S-Corp, then you will file a different form for the company, but the procedure is roughly the same - Income gets passed through to the owners via a Schedule K-1. If you go C-Corp, then the owners will pay no tax on their own Form 1040, but the C-Corp itself will pay income tax.

As far as whether you should try to spend the money as business expense to avoid paying extra tax - That's highly dependent on your specific situation. I'd think you'd want to get tailored advice for that.

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  • Thank you for the advice and information. I will look in to those forms. Still confused on if the money stays in the account for the business if it will get taxed at the end of the year? Up until now, we've been paying all the expenses out of our own pockets, but now want the company to start paying the expenses. Thanks. Aug 24 '15 at 13:05
  • @rayjamesfun Yes, the money will get taxed. The question is whether it gets taxed at the level of the business (if you elect C-corp) or if the income "passes through" to the owners and gets taxed on the Form 1040 (partnership and S-corp). In your case it looks like the default tax status is partnership, so you'll need to allocate shares of your income to the owners, and each will pay tax on their share. For "pass through", the owners pay the tax whether or not the money is the company account. (There are other consquences to paying it out or holding though, beyond the scope of this question.)
    – user32479
    Aug 24 '15 at 13:12
  • @rayjamesfun Specific to the part of your comment on expenses: The business should pay its expenses out of its own account. That's for sure.
    – user32479
    Aug 24 '15 at 13:21
  • Thanks a bunch for the info! It makes much more sense now. We will just split the money and owe taxes individually on it, after we pay for some expenses though. I appreciate you guys getting me going in the right direction. Aug 25 '15 at 2:52

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