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Last year, I formed a LLC Partnership with a friend. My friend and I both work full-time jobs while we are trying to get our business launched in our spare time.

The nature of our business is such that we receive lump sum payments for specific jobs. Let's say we complete 3 jobs during a year and earn a total of $5,000. If we split our earnings 50/50, we each make $2,500. This amount is not enough to make any significant impact in our personal financial situations. Therefore, we do not wish to take a distribution, but would prefer to keep the money in the company's bank account to reinvest into the businesses at a future date. However, when completing our personal income taxes using online services, we discovered that we had to pay income taxes on this income even though we are not taking distributions at this time.

What is the best way to retain LLC business income for reinvestment without paying taxes, or is the only solution to spend it on deductible expenses prior to December 31st of each year?

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  • Is this the US? Laws around LLC taxation are going to differ by country.
    – Brythan
    Apr 21, 2018 at 23:21
  • If US, weren't you made aware of the personal liability when you filed the partnership return (1065 plus K-1's) which was required March 15?
    – dave_thompson_085
    Apr 22, 2018 at 23:53

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In the United States, Limited Liability Companies (LLCs) may choose either pass-through taxation or corporate taxation.

What is the best way to retain LLC business income for reinvestment without paying taxes, or is the only solution to spend it on deductible expenses prior to December 31st of each year?

There is no way to retain LLC business income for reinvestment without paying taxes. Your choices are

  1. Pass-through taxation on the income left after any deductible expenses.
  2. Corporate taxation requires paying corporate taxes. Any remaining amount may be retained. But if ever withdrawn, you'll have to pay taxes again.

Source: Nolo.

You can carry forward losses however. So if your business loses money, you can carry forward that loss and use it against future income. This is something that you can use to smooth out purchases. Overspend one year so as to max out the deduction and have a bit of a deduction left for the next year.

If you don't eventually make a profit, the IRS may tell you that you have a hobby, not a business. Hobbies generally don't get to deduct expenses.

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  • Note partnership/passthrough is the default, and if you do elect corporation (on form 8832) they make it difficult to switch back.
    – dave_thompson_085
    Apr 22, 2018 at 23:57

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