A Limited Liability Company (LLC) is a flexible business option. It combines the components of a corporation, sole proprietorship, and partnership. And, it’s also recognized as its own legal entity.
LLCs come with many advantages, but tax benefits are the top reasons you need to form this type of business.
If you’re in limbo about what type of business to start, continue reading. Learn here about the LLC tax benefits you could receive.
1. LLC Tax Benefits: Decide How You’re Taxed
With LLCs, business owners get the benefit of tax electives. An LLC can get taxed as a partnership or sole proprietorship. It depends on ownership.
If the business has multiple owners, they may elect to file as a partnership. If one owner, then they may file as a disregarded entity or a sole proprietorship. In this case, business owners treat their LLC income as personal income.
There’s also the option of taxation as a corporation. Income under $75000 gets taxed at a lower corporate rate. Consult with the IRS regarding Form 8832.
2. Pass-Through Taxes
The IRS does not refer to an LLC as a corporation. So for tax reasons, the LLC isn’t separate from its owners. This is a pass-through entity.
Any income the LLC earns passes through the business to its owners. The owners then report profits and losses on their individual tax returns.
This does relieve members from making quarterly payments to the IRS. And, they’re still required to report earnings through an information return every year.
As of this year, pass-through entities are eligible for a 20% tax deduction through the Tax Cuts and Jobs Act.
For additional information, you can learn more from a tax professional.
3. Mandatory Franchise Tax
Franchise Tax is a mandatory state tax. Certain states charge business owners for the right to exist and do business within the state.
The amount of franchise tax varies in each state, with some states imposing the tax every year. Businesses may register in multiple states. But don’t expect to avoid the tax in one state because you pay it in another. You may have to pay the franchise tax in more than one state.
But not every business gets penalized.
For LLCs, that means another benefit in taxes. While other business entities pay the mandatory tax, LLCs catch a break in some states. Sixteen states charge a Franchise Tax, some not including LLCs.
That’s a tax savings in more than half the states in the US.
4. Double Taxation Exemption
Some businesses, like corporations, pay income taxes twice. This is double taxation. The same source of earned income gets taxed on two levels — corporate and personal.
Limited liability companies do not pay taxes on a corporate level. They forgo business taxation altogether. They pay personal income tax based on their share of the profits earned.
For this reason, LLCs avoid double taxation, benefiting owners tax-wise annually.
Form an LLC Today
There are many reasons for a prospective business owner to form an LLC. Above all is the LLC tax benefits.
Yes, every company’s tax situation varies. But, the majority of tax benefits are the same. Consider forming an LLC and enlist the help of a professional to learn all its benefits.
Read through more of our business resources for up-to-date insight on starting a business.