Four Ways An LLC Can Be Taxed & How It Can Affect You

A limited liability company is a type of business entity becoming more and more popular. It’s a hybrid between a corporation and a partnership, which offers some protection to the owners. Let’s take a look at what LLCs are, how they work, and why they’re so popular.

A limited liability company is an entity that combines the best aspects of corporations and partnerships. The owners of an LLC have limited liability for the debts and obligations of the company, but they also enjoy some tax benefits and other benefits that come from being in business with other people.

If you found yourself reading this article, you might be an entrepreneur, interested in starting an LLC, or already have an LLC

Well, this article is for you…

The first tax election you may choose is your LLC taxed as a sole proprietor.

LLC offers maximum flexibility. This is common for small business owners who either don’t want to deal with the paperwork and compliance or just want to start as an LLC.
The main benefit of a single-member LLC is that you don’t have to file separate tax returns.

You’ll save time by not having to fill out another set of forms, and you’ll have one less thing to worry about come tax time.

The benefits of a sole proprietorship are that there is no legal distinction between the business and its owner. The owner can do anything they want with their company without worrying about getting permission or approval from anyone else.

They can spend money on any expense they want to without getting consent from a board or shareholders. They can also hire employees without going through any complicated hiring process or paperwork.

Take note:
The sole proprietorship allows you to focus more time and money on operating, managing, and growing your business. While there are pros, there are also cons to a sole proprietorship.

Your business will be audited at higher rates since you are mixing your personal and business income. Additionally, you must pay self-employment taxes, similar to payroll by employees, and you will be liable for the business.

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The second tax election you may choose is LLC taxed as an S corporation.

With the second tax election, you may be able to save on taxes. This means that the company will be treated as a pass-through entity and not pay any corporate income tax. Instead, each owner of the company will report their share of profits or losses on their income taxes.

You can find more information about this option in form 2553.

The benefits of being an S corporation are avoiding double taxation and having a higher limit for deducting losses. You will also not be required to pay self-employment taxes, which are a significant benefit for small business owners.

If you want your LLC to be taxed as an S corporation, you need to file Form 2553 with the IRS. The form has three main parts:

  1. name and address of the LLC;
  2. type of entity;
  3. election made by filling this form.

Some people may choose this type of taxation for their LLC because it can be advantageous in certain situations, but you should consider all the pros and cons before filing Form 2553 with the IRS.

Take note:

To qualify for the S-corporation taxation election, you must live in the US.

All LLC members must be US citizens to meet the requirements associated with the S-corporation. If the member is a partner, the partner must be a US citizen.

If the member is a corporation, the corporation must be established in the US; there is no exception to this rule.

Having an LLC taxed as an S corporation means reporting the number of earnings or losses on your tax return.

Additionally, an LLC taxed as an S corporation is considered a pass-through entity that doesn’t pay tax but instead passes the earnings and losses through to the shareholders.

You are not required to pay double taxation, and you can minimize the sting of self-employment taxes—the con to having your LLC taxed as an S corporation. If a non-allegeable member is part of the S corporation, you must choose the third option.

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The third tax election you may choose is your LLC taxed as a C corporation.

This is when your LLC is taxed as a regular corporation under the Internal Revenue Code. This can be beneficial for some businesses looking for the benefits of being a C corporation without worrying about double taxation.

As an LLC, you are not required to pay taxes on your profits twice as if you were an S corporation or partnership. However, when this election is made, your company will be subject to corporate taxes and will have to pay them on all its income from sources outside of the United States.

Form 8832 is a form that you file with the IRS to elect to be treated as a C corporation. You may have to file Form 8832 if you are an LLC and you want to be taxed as a C corporation.

Some of the benefits of electing to be treated as a corporation include:

  • The ability for shareholders in the company to deduct their dividends from their tax returns.
  • The company will not have double taxation because it is not subject to self-employment tax.
  • The company can grow faster because it can make more significant investments than an LLC without having any additional tax liability.

Take note:

You must elect C corporation as soon as possible. Since you only have 75 days after filing to select this tax status. If you correctly file form 8832 and your LLC is taxed as a C Corporation, your business is considered a separate entity for federal tax purposes.

An S corporation tax election may be more beneficial than its shareholders.

A C-corporation tax election may be the next best option for you. If you are a non-US citizen, the cons associated with a C corporation is that a C-corp is subject to double taxation.

This means that the government will tax income as it is earned. It will later tax the income upon distribution of monies to the shareholders.

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The fourth tax election you may choose is your LLC taxed as a partnership.

The fourth tax election you may select is your LLC taxed as a partnership. This is an option for those who want to have a limited liability company (LLC) but still be taxed as a partnership.

A partnership is one of the most common business structures in the United States. It’s also one of the most complicated since many different types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships.

LLC taxed as a partnership is a popular choice for small businesses. It is an attractive option for companies looking for flexibility and the ability to allocate profits to individual members of the company.

Some States offer community property, which means that the husband and wife can choose to be taxed as a single member or as a partnership.

The benefit of a partnership tax election is that it is similar to an S corporation because it is considered a pass-through entity. All economic activity must be reported on the personal tax return.

Take note:

The cons associated with a partnership tax election is the complexity involved. It is more complex than an S corporation.

It can take 35 hours to prepare yourself for learning thoroughly and maintaining partnership records. Choosing the correct tax election for your business is between saving yourself money and losing money.

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To wrap up the discussion:

At any point in this article, if you found yourself asking yourself, what does he mean by that? Get the guidance you need today. Click the link in the description below to schedule your free consultation, and make sure to share this information with your colleagues.

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