Do I have to claim my business earnings as my personal income?

UPDATED: Sep 30, 2022

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Do I have to claim my business earnings as my personal income?

I am disabled. I have had my defaulted school loans discharged through the disability discharge program. This program has income limits that, if I make more than the maximum income, I would have to begin repayment. I am considering working with the Department of Vocational Rehabilitation to get funding to start a home based woodworking business. I intend to keep the business small and don’t believe it is likely to earn more than the maximum income I am allowed, but if it did, would having a LLC business structure allow me to keep my personal income below the limit?

Asked on December 10, 2016 under Business Law, Colorado


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

For a more definitive answer, consult with a tax professional about structuring things for the maximum benefit to you, but as a general matter: 
Most LLCs have "partnership" or "pass through" tax status, which means that the LLC's profit (or, for that matter, loss) "passes through" the LLC and becomes part of your income; so if you went for this most common tax status, LLC profit (that is, net profit: gross sales or proceeds less legitimate business expenses & deductions) would become part of your personal income.
You can instead elect "corporation" tax treatment, in which the LLC is itself taxed. The advantage is that the LLC profit or income is not considered your income until and unless you distribute it to yourself. The disadvantage is, you experience "double taxation" on LLC profit: it is taxed once, as LLC income; then if and when you distribute any to yourself, the amount you distribute is taxed again as part of your income.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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