If you are trying to determine how to structure your business or just trying to figure out the tax benefits and implications of having an LLC, you have come to the right place!
One of the most popular ways to organize a business is by registering it as a limited liability company. This is also known as an LLC. Unlike S corporations and C corporations, they require much less paperwork and are much more straightforward.
When it comes to tax benefits, LLC’s give business owners much greater flexibility. This is clear in comparison to sole proprietorships, corporations, and other forms of business organizations.
In this article, we will take a look at the main tax benefits of an LLC.
What is an LLC?
A limited liability company (LLC) is a legal form of business where the owners are not personally liable for the company’s debts and or liabilities. An LLC is the least complex business structure out there.
Man tax benefit of an LLC
The biggest tax benefit of an LLC is the flexibility on how they are taxed. This is definitely the main benefit but least understood advantages of forming an LLC.
As an LLC, you can decide whether to be taxed as a sole proprietorship, partnership, S corporation, or C corporation. This is done by filing IRS Form 8832.
Depending which route you choose, it has its own tax implications. Let’s look a little closer at those.
1. Taxed as: Sole Proprietorship
If you set up your LLC to be taxed as a sole proprietorship, your profits and losses that your business generates will have to be reported on your personal tax return. You will file the regular Form 1040 along with a Schedule C Business profit or loss form.
2. Taxed as: Partnership
If the LLC is set up as a partnership, then else even file a form 1065 partnership return. Each of the owners / Partners in the LLC pay their taxes according to his or her share of the profit and losses. He’s also beautiful that on the Form 1040 and a schedule K-1.
3. Taxed as: S Corporation
If set up as an S corporation, the S corporation files Form 1120S but won’t pay any corporate taxes on that income. Instead, the shareholders of the S corporation LLC will report their share of income and losses on their personal tax returns. By doing this, you avoid double taxation.
4. Taxed as: C Corporation
Lastly, if you set up your LLC as a C corporation, you will file the Form 1120 corporate tax return. The C corporation LLC will have to pay taxes on profits made. Once that’s done, members will report any of the income that is passed on to them on their individual tax returns as well. They will have to pay taxes on that too. If the C corporation doesn’t pass some of the income earned to its members, then the members won’t have to pay taxes on that income.
Which option should you go with?
This will completely depend on your company structure and tax situation. As businesses change over time and grow, they also start to become more profitable and one tax approach might not work forever.
In that case, make sure to do your research with your tax adviser and any partners that you might have in your business. This is to make sure that you’re well-informed before you make any business decisions and structure your business accordingly.