An LLC offers several tax advantages, including simple flexibility in choosing how to tax the entity.
When deciding on the structure of a business, one of your main concerns should be taxes. If you are considering an LLC (Limited Liability Company), please note that the Internal Revenue Service (IRS) does not have a special tax classification for LLCs. This provides the freedom to choose how your LLC will be taxed.
An LLC can be taxed in four main ways:
As a sole proprietorship
As a partnership
As a C corporation (C Corps)
As an S corporation (S Corps)
If you have only one LLC member, you can choose to pay taxes as a sole proprietorship, partnership, or C corporation. If your LLC has multiple owners, a sole proprietorship is not an option, but the other three are.
Here are some things to take into account when deciding how you want your LLC to be taxed.
Tax Rates
When choosing the tax status of your LLC, you must consider whether your business would be better served by treating the IRS as a "disregarded entity" or a corporation. A disregarded entity, which means the LLC is not considered separate from its owner, is treated the same as a sole proprietorship for tax purposes. In this case, the income of the LLC is treated as personal income. This "pass-through taxation" simplifies your tax return. Conversely, if you choose business status, your income will be taxed at a lower business rate up to a certain amount, as defined by the IRS.
Double Taxation
The Company and its shareholders pay taxes on their income, resulting in double taxation. A business also pays corporate taxes. A Limited Liability Company can help you prevent double taxation unless you structure the entity as a corporation for tax purposes.
Business Expenses
Members of the LLC can make tax deductions for legitimate business expenses, including the cost of setting up the LLC, in their returns. Deductions, such as earnings, are shared among owners based on a percentage of the property. Keep in mind that for some employee benefits, such as health, disability, and life insurance, a C corporation may be a better option, or the benefits may become taxable for LLC members. Also, LLC owners are eligible for the Qualifying Business Income Deduction, which allows LLC owners to claim a 20% deduction from net business income in addition to the deduction for business expenses.
Deductions for capital expenditures
LLCs can deduct capital expenditures for purchases of goods or equipment that the business will use over a period of one year. The deduction is spread over the entire year per IRS regulations.
Once you have decided on the tax status, the next step is more documents. That is, if you want your Limited Liability Company to be taxed as something other than a sole proprietorship, you must complete Form 8832 to notify the IRS of the partnership or corporate status of your LLC.
For some small business owners, putting together a business as an LLC offers the most adaptability in defining how the business is taxed while still providing limited liability for a corporation, but with less paperwork. . Since every LLC is unique, it is a good idea to get proper legal advice before you continue to choose your tax status.
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