Limited liability companies, or LLC’s, give business owners far greater federal income tax flexibility, especially when compared to sole proprietorship, partnerships or other types of organizations.
Let’s look at this in more detail:
What is the primary benefit of an LLC as far as taxes are concerned?
For tax purposes, LLC’s are known as pass-through’s, which describes the way the earnings are passed directly to the owner(s) without the necessity to pay corporate federal income taxes first.
Different to C corporations, LLC’s are not subject to double taxation and are not required to pay taxes on their income. This means that any distributions to its owner(s) also gets taxed as individual income. Significant money can clearly be saved in the long run by avoiding double taxation, and is the primary benefit of an LLC.
How flexible are LLC’S when it comes to taxes?
The IRS allow the business owners of an LLC to select how they want their business to be taxed, such as a sole proprietor, partnership, S corporation or C corporation; the choice can be made by filing an 8832 Form.
That said, there are some limitations involved, such as if multiple owners of an LLC not being permitted to be taxed as a sole proprietor. LLC’s with more than owner are automatically taxed as a partnership by the IRS, and if you opt to set your LLC up as a sole proprietorship, you’ll be required to report profits and losses generated by the business on your personal tax return. Usually, a Form 1040 individual tax form and a Schedule C business profit or loss form are filed for the LLC.
Let’s look at how LLC’s are taxed based upon whether they’re filed as a C corporation, S corporation, multi-owner as a partnership:
C corporation
Choosing to tax an LLC as a C corporation means that you’ll be required to file a Form 1120 corporation tax return, and pay a tax on profits. Any of this income passed on to members must be reported on their individual tax returns as dividends or interest, and again, pay taxes on it.
S corporation
Opting to set an LLC up as an S corporation means that a Form 1120S must be filed, but are not required to pay any corporate income taxes. The LLC’s shareholders must report their share of the income on their personal tax returns; avoiding double taxation.
Multi owner as a partnership
LLC’s choosing to be taxed as a multi-owner partnership must file a Form 1065 partnership return, and according to their share of the profits or losses, each owner will pay taxes reported on Form 1040 and a Schedule K-1.
In conclusion
LLC’s offer business owners the ultimate in tax flexibility, and are somewhat easier to set up than other types of corporations. If you need further advice and guidance surrounding LLC’s, it’s usually helpful to consult with a professional entity management service provider.