Affording business owners the greatest degree of flexibility, LLC operating agreements include management provisions and buy-sell provisions, which make it a popular entity top own real estate, boats and airplanes. It’s also popular among foreign citizens seeking to render services or sell products.
Here’s a more in-depth look at LLC’s and its potential tax advantages:
Being taxed as a sole proprietorship
If your LLC consists of just you, then you’ll start out being taxed as a sole proprietorship, with all income and expenses being ‘passed through’, to be reported on Form C of the individual tax return of the single member. There is no requirement for An Employer Identification Number, or EIN.
Taxes for multi-member LLCs
Initially, an LLC with multiple members will be taxed as a partnership that must apply for an EIN using Form SS-4. For each member, every year, a Form 1065 Partnership Return must be filed with a Form K-1, listing income and losses to be reported by each member.
The main tax disadvantage of an LLC
If your LLC is taxed as a sole proprietorship or partnership, all taxable income passing through to the owners, is treated as ‘earned income’ by the IRS, and is therefore subject to employment taxes.
However, there is a way to avoid this disadvantage as an LLC, and this is by making a Subchapter ‘S’ Election by applying for an EIN using Form SS-4 and by filing a Form 2553 within 75 days of the date that the LLC was formed, or beginning of a tax year.
Once reasonable compensation and other business expenses have been deducted, the taxable income of an LLC must be reported by the member(s) as passive income, instead of income that is earned and subject to Social Security and Medicare contributions.
Once the ‘S’ election has been made, a Form 1120S Corporation Income Tax Return should be filed each year.
Electing to be taxed as a Corporation or C Corp
By applying for an EIN and filing a Form 8832 within 75 days of the date of formation or beginning of a tax year, an LLC can elect to be taxed as a Corporation, or C Corp. once reasonable compensation and other business expenses have been deducted, an LLCs taxable income that has elected the tax status of a C Corp, is taxed at the Corporation tax rates on a Form 1120 Corporation Tax Return, to be filed every year.
If you would like to know more about the tax advantages of forming an LLC, or would like a professional firm to handle your taxes as an LLC owner, simply reach out to a local entity management firm, who will give you all the guidance you need and take care of everything, expertly.