As a limited liability company, how are Deka Lash members taxed on the company's taxable income?
Deka_Lash Franchise · 2024 FDDAnswer from 2024 FDD Document
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company was established as a limited liability company. In lieu of corporate income taxes, the members are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for income taxes is included in the financial statements.
The Company's Form 1065 for the years ending December 31, 2023, 2022, 2021, and 2020 will be subject to examination by the IRS, generally for three years after being filed. Generally accepted accounting principles require tax effects from an uncertain tax position to be recognized in the financial statements only if the position is more likely than not to be sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the more-likely-than-not threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded. Management has evaluated the tax positions reflected in the Company's tax filings and does not believe that any material uncertain tax positions exist.
Source: Item 23 — RECEIPT (FDD pages 63–234)
What This Means (2024 FDD)
According to the 2024 Deka Lash Franchise Disclosure Document, Deka Lash was established as a limited liability company. As such, the company itself is not subject to corporate income taxes. Instead, the members of the LLC are taxed on their proportionate share of the company's taxable income. Therefore, the financial statements do not include any provision or liability for income taxes at the company level.
This pass-through taxation structure means that profits and losses from the Deka Lash business flow directly to the members' individual income tax returns. This can be advantageous as it avoids the double taxation that occurs with corporations, where profits are taxed at the corporate level and again when distributed to shareholders. However, each member's individual tax situation will determine the actual tax impact.
The FDD also mentions that the company's Form 1065 for the years ending December 31, 2023, 2022, 2021, and 2020 will be subject to examination by the IRS, generally for three years after being filed. Management has evaluated the tax positions reflected in the Company's tax filings and does not believe that any material uncertain tax positions exist. A prospective franchisee should consult with a tax advisor to understand the full implications of this tax structure and how it will affect their personal tax liability.
It is important for potential Deka Lash franchisees to be aware that the IRS could audit the company's tax filings for the previous three years. While Deka Lash management believes there are no material uncertain tax positions, an audit could still result in adjustments to the members' tax liabilities. Therefore, franchisees should maintain thorough records and seek professional tax advice to ensure compliance and minimize potential risks.