Tax Benefits of LLC

Table of Contents

4. What do you need to do to form an LLC?

What are the tax benefits of an LLC?

From how much of your personal assets are at risk to tax, as an entrepreneur, you want to select the right business structure. The best business structure will give you the right balance of benefits and legal protections. This where the limited liability company, or LLC, shines.

As opposed to a partnership or sole proprietorship, an LLC grants businesses owners personal liability protection for any of the business’ actions. In general, the tax benefits of an LLC are touted. Also, in addition to being taxed favorably, LLCs come with greater flexibility and much less paperwork than S and C corporations. When it comes to saving your business money and tax, an LLC may very well be the proper structure for your company. In this article, our California LLC lawyer discusses the tax benefits of an LLC.

The advantages of creating an LLC

Pass-through tax

One of the biggest tax benefits of an LLC is its ability to avoid being taxed twice. The IRS treats LLCs as pass-through companies. As opposed to C corporations, owners of LLCs do not have to pay corporate federal income taxes. Rather, owners have the choice to report their share of losses and profits on their individual income tax return.

This is referred to as pass-through taxation. It prevents your company from being subjected to tax twice – once at the personal level and once at the corporate level.

Picking how you are taxed

One of the biggest advantages of choosing an LLC is the option to pick how you are taxed. An LLC can decide to be taxed as a partnership, a sole proprietor, an S Corp, or as a C Corp.

If you decide you want your tax to be in the form of an S Corp or sole proprietor, the income of your LLC will be regarded as personal income on tax returns. This means you will only be taxed the one time.

If you decide you want your tax to be in the form of a corporation, your LLC income will be taxed two times. It will be taxed once at the corporate level and once at the personal level. However, for the first $75,000 of income, you will be taxed at a lower corporate rate.

There are big advantages with both approaches. In the end, it depends on how much income you want to take personally as well as how much you intend to reinvest in the company.

Business expenses deduction

When you are building a startup, costs can add up quickly. Thankfully, the IRS permits you to write off a lot of these expenses when you submit income tax every year.

The owner of an LLC, according to the federal tax code, may deduct startup expenses the business incurs, regardless of how the LLC is setup. What are startup costs? These are deductible costs the LLC owner incurs at the very early stages of developing the business. This would include things like training new hires, advertising campaigns, and travel expenses. Essentially, it is anything that gets the company off the ground prior to the first sale.

After the business is open officially, a business owner may continue to write off continuous operating expenses for business costs like internet, cell phones, business meals, office space, and accounting fees.

Before you pick a limited liability company as the right business entity for you, think about the possible disadvantages.

The disadvantages of creating an LLC

The tax benefits of an LLC are nothing to sniff at, certainly. However, compared to a partnership or a sole proprietorship, an LLC can cost more money to operate.

Also, LLC members are regarded as self-employed and need to pay self-employment tax contributions toward Social Security and Medicare. However, the employer portion of the self-employment tax may be deducted from their tax returns.

What do you need to do to form an LLC?

It is fairly easy to reap the tax benefits of an LLC. To form an LLC, you must start by picking a name for the business. The name must be available for use and not infringe on any trademarks. It is then necessary to submit articles of organization to the Secretary of State and pay a filing fee. For better legal and financial protection, owners are advised to create an LLC operating agreement even in states where it is not required.

If you are thinking about how to organize your business, an LLC is an excellent option when it comes to tax. An LLC boasts flexibility and simplicity when it comes to how the company will be taxed. Also, an owner does not have to worry about personal liability or losing their personal assets. Regardless of the tax benefits of an LLC, you should think about your business goals and decide if an LLC is the best fit. Remember, the decision does not have to be permanent. Your needs may change over time, and you can always change your company structure down the road.

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