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Benefits of an LLC (Tax Advantages of an LLC?!)


If you’re on this page, you’ve reached the point where you’re asking yourself a very important question:

What are the benefits of an LLC?

In summary, here are the benefits of LLC:

LLCs do not save in taxes. LLCs, however, enjoy personal liability protection as the most simple business structure.

LLC protects your personal assets from business debts and lawsuits. What this means is that if something happens to your business, your personal assets such as personal bank account, car, and home will be protected. Due to the several benefits of an LLC, the first thing successful entrepreneurs do is form an LLC. I highly recommend forming your LLC before you start your business so you can avail LLC advantages without facing any difficulties.

I’m going to answer those questions so you have a clear picture of all the benefits of an LLC entrepreneurs like you can benefit from.

If you’re looking to start an LLC and want to know all benefits of an LLC, email me at sam@mollaeilaw.com to get started.

S Corp vs LLC 2019

S Corp vs LLC Tax Benefits

Let’s talk about S Corp vs LLC in 2019.

LLC in California benefits in terms of tax are one of the main reasons owners incorporate an LLC. However, forming an S Corp has its own different tax benefits.

Deciding whether to form an LLC or an S Corp can be a difficult decision. When deciding whether you want to make an S Corp vs. LLC in 2019, the tax benefits of both can be a major factor.

When it comes to paying tax, you can benefit from both the LLC advantages as well as S Corp advantages. This means that both structures have different tax benefits for the business owner, but which one is right for you?

If you’re ready to talk in detail about the benefits of an LLC and those of an S Corp, email me at sam@mollaeilaw.com.

 

Tax Advantages of LLC

For the most part, LLC does not have tax benefits.

One of the main tax advantages of LLC is that an LLC lets the owner decide how they are taxed on their income.

When you operate through an LLC, you can choose whether to be taxed as a sole proprietor or as a corporation.

One of the tax advantages of LLC is that you are not subject to double taxation. A corporate owner has to pay taxes on net and dividend income, but an LLC owner does not. That said, it’s equally right to say that relief in double taxation is also one of the benefits of an LLC.

Forming an LLC can have an impact on how you prepare for retirement. LLC owners have larger limits to retirement account contribution, so one of the many LLC advantages is that you can save more as you make more.

Want to know additional tax advantages of LLC?

Well, another advantages among many tax advantages of LLC is that an LLC allows you to lease property you already own in the name of the LLC. When you lease your property to an LLC (such as home office), you are able to legally write it off as a business expense.

Now that you’ve read the tax advantages of LLC, let’s talk about the tax benefits of an S Corp.

S Corp vs LLC in 2019 – The Tax Benefits

An S Corporation has many specific tax benefits of its own. One important benefit of an S Corp is the ability to transfer ownership without triggering termination of the entity, which can happen in some situations as LLC owners or Sole Proprietors.

Another tax advantage of S Corps is what’s called “pass through taxation.” Income passes through the business and is reported only on shareholders’ income tax returns which can save a business lots of money.

While deciding between S Corp vs LLC in 2019, you should also know that the most important tax benefit of an S Corp is the ability to lower how much you pay in self-employment tax. By paying yourself a salary, you only pay Medicare and Social Security taxes on that salary and not on the rest of the profit your business makes.

Let’s put that into simple math terms. If your business makes $100,000.00 as a Sole Proprietor, you would have to pay tax on that whole amount. However, if your S Corp makes that money and pays you a salary of $30,000.00, you only pay those taxes on that amount.

This translates to $70,000.00 and you don’t have to pay Medicare and Social Security tax on.

Besides LLCs and S Corporations, business owners can also form Sole Proprietorships which have their own unique benefits.

 

Benefits of an LLC vs Sole Proprietorship

A Sole Proprietorship is a very simple business structure when compared to an LLC. All profits, liabilities, and taxes are the direct responsibility of the owner.

Unlike choosing S Corp vs LLC in 2019, there are no tax benefits or liability shields which means that you could be on the hook for a lot more money if something goes wrong.

You might be wondering, what exactly are the tax benefits of a Sole Proprietorship?

Let’s explore more about it below.

 

Tax Advantages of LLC vs Sole Proprietorship

Tax Benefits of Sole Proprietorship vs LLC

Sole Proprietorship gives a business owner a really simple tax return. All the profits and losses of a business are reported right on the owner’s income tax, so there is less that a Sole Proprietor has to categorize and file.

Another tax advantage of forming a Sole Proprietorship is deducting the cost of health insurance. This makes it much more cost-efficient to provide good insurance to the owner and any employees.

One very unusual tax benefit of Sole Proprietorship is writing off young family member employees. If a Sole Proprietor hires their minor children, they don’t pay any payroll taxes on that salary. Additionally, if the child makes $8,000.00 per year or less, they don’t owe any federal income tax.

Now that we’ve talked about the benefits of an LLC vs. different types of business structures, let’s go into some specific benefits of an LLC you may avail depending on your situation.

 

LLC Advantages for Rental Property

One of the biggest LLC advantages for a rental property is shielding your assets.

If your rental property is owned by an LLC, anyone who wants to sue you can only go after what your LLC owns and can’t touch your personal assets.

For example, let’s say that you own a rental property and have an irresponsible tenant. Your tenant isn’t paying attention one day and their kid nearly drowns in the pool, so they want to sue you for that.

Because the property is shielded by an LLC, that tenant cannot sue for anything you personally own. They can only sue for the LLC’s assets, which will prevent you from losing everything you have to a frivolous lawsuit.

A less obvious benefit among various LLC advantages for rental property is the professional appearance. You will be taken more seriously as a landlord by investors, tenants, repair people, and others if you have an LLC as opposed to not having any formal business structure in place.

If you have a rental property and want to set up an LLC, email me at sam@mollaeilaw.com to begin.

 

Benefits of an LLC Operating in Wyoming

One benefit of forming a Wyoming LLC is that LLC owners in Wyoming don’t have to pay any state taxes. This can be a huge money saver and one of the essential tax advantages of LLC for someone who is just starting a business

Wyoming LLCs keep their owners’ information totally private. An owner of a Wyoming LLC will not be listed on any public record so they will be able to operate with total security.

LLCs formed in Wyoming never expire, can have unlimited owners, and are very easy to operate from anywhere in the world. Additionally, Wyoming LLCs are extremely simple to transfer ownership if the need arises.

The most interesting advantage among different LLC advantages in Wyoming is that you do not have to be a U.S. citizen to form one. Not only can they be run anywhere, they can be run no matter where you were born.

 

LLC Benefits in Delaware

Delaware has a statute of limitations on personal liability for LLC members.

This means that after a certain period of time, if your LLC fails, you are no longer liable to lose money because of it.

In addition to the above, Delaware LLC incorporation is very easy to do. Because the IRS doesn’t require much information from Delaware LLC owners, it’s a simple process to get started. Additionally, maintenance is simple and fees are very low compared to other states.

 

LLC Benefits in Texas

Benefits of LLC in Texas

Texas makes owning an LLC simple by not requiring there to be a general meeting of shareholders every year. That results in less paperwork, money, and time that you have to spend on something your business might not need.

Additionally, one of the LLC advantages of operating business in Texas is that LLCs only need one owner to form which can itself be a business if that would be the best way for your particular business to run.

 

LLC Benefits in California

California offers some great incentives to incorporate, such as a 9% corporate tax. This is considerably lower than other states that you might form an LLC in which simply means that you can avail the tax advantages of LLC while operating business in California.

Additionally, California wants businesses to form an LLC and stay in California so it offers various tax advantages of LLC such as new employment hiring tax credits.

When you incorporate in California, you are also able to maximize your retirement contributions even further through special deferred compensation plan so you have the most money possible in your bank account when it’s time to retire. This is another one of the many LLC in California benefits you should consider.

 

Sole Proprietorship vs LLC California

It is beneficial for a business owner to form a Sole Proprietorship in California, but the state specific benefits of this structure are different than a California LLC.

Unfortunately, Sole Proprietors in California do not have the same liability shields and tax advantages that LLCs or S Corps would. A Sole Proprietor is still 100% personally liable for all debts and actions the LLC undergoes. They also must pay tax on all income earned by the business.

The one advantage of forming a Sole Proprietorship in California is the simplicity of the process. Because all taxes and liabilities are passed right onto the business owner, there aren’t any specific state filing requirements.

This makes the structure extremely easy for just about any person to form, which can be a relief for someone who might not be able to form an LLC in California.

 

LLC Benefits Nevada

Nevada, like Delaware, is one of the best states in America for a business owner to incorporate as an LLC.

In Nevada, when you form an LLC, you’re allowed to include ‘non-economic members.’ These people are listed on the LLC with voting/managerial rights, but they do not own any part of the LLC.

Why would you do this? Maybe because you want someone else to help run the LLC but would like to keep ownership only under your name.

Because Nevada is a very business-friendly state, they offer several different methods of expedited approval on new LLCs so you can get your business up and running fast.

Finally, one of the single most important LLC in California benefits in Nevada are their series LLCs. These allow for LLC owners to set up liability shields within the LLC, shielding the assets from each other.

Why does this matter?

If one of your entities that operates through Nevada LLC is sued, they can only sue for assets owned by that entity. The rest of the assets owned by your LLC are safe, so you can feel confident knowing your businesses are protected.

 

Benefits of an LLC: Why You Should Really Form an LLC

Benefits of Forming an LLC

 

Simply put, when you form an LLC, your business gets incredible LLC advantages including the tax advantages of LLC. No matter where you form your LLC, you will get three amazing LLC in California benefits.

  • Flexibility on how you’re taxed
  • Protection of your personal assets
  • A professional and trustworthy business reputation

Other Important LLC Benefits

LLC Offers Limited Liability Protection

As the name suggests, LLCs provide their members personal protection from liability.

What this means is that LLC members are not personally liable for business debts and judgments incurred by the LLC.

Further, creditors are limited from seeking the personal assets of LLC members due to liabilities that are incurred by the LLC.

This limited liability protection is a HUGE advantage over a regular partnership, where all members are personally liable for company debt.

Also, an LLC, since it is a separate entity, can apply for and build credit separately from the partners’ personal credit. This is another one of the advantages of LLC because it helps eliminate personal liability for business debt, as well as avoiding tension among partners regarding credit worthiness.

 

LLCs Require Less Paperwork

An LLC is much simpler to run than a Corporation.

LLCs will need to deal with less annual requirements and ongoing formalities than C-Corporation or S-Corporation.

While a Corporation requires officers, board of directors, regular director meetings and shareholder meetings, an LLC does not require these formalities.

Further, there is no need to get approval from a board before taking business action — which is one of the main benefits of an LLC. This simplicity and ease of doing business makes it a lot easier on business owners to operate an LLC.

Also, LLCs are free to make any organizational structure that is agreed on by the members. LLCs can be managed by the members or by managers — unlike Corporations which have a board of directors who oversee the major business decisions of the company and officers who manage the day-to-day affairs.

Furthermore, there are no restrictions on who can be an LLC member or how many members an LLC may have — unlike an S-Corporations.

For all of these reasons, an LLC is much simpler to run and operate as compared to running business as a Corporation.

 

Tax Benefits of LLC: Pass Through Taxation

LLCs can elect how they are taxed.

The IRS does not consider an LLC to be a separate entity for tax purposes.

This means that the IRS will not tax the LLC directly. Instead, members of the LLC get to determine how they want to be taxed.

There are several options:

Single Member LLC

Single Member LLC structure is by default called a “Disregarded Entity” by the IRS. A disregarded entity is treated the same as a sole proprietor, so your LLC’s income will be treated like personal income.

Profits or losses from the business are not taxed directly but instead are taxed through the single member’s personal federal tax return.

Partnership in an LLC

Members elect to be treated like a traditional “Partnership” for tax purposes. For businesses with multiple owners, LLC offers similar tax benefits, plus the added advantages of a corporate form.

If the members of an LLC do nothing, their LLC will be taxed as a partnership; however, they can elect for their LLC to be taxed as a Corporation — which is typically the preferred option.

LLC Filing as a Corporation

The members of the organization may also choose to file as if they were “Corporation.” If you choose Corporate taxation, your business will be taxed at a lower corporate rate for the first $75,000 of income.

If the members of an LLC want to keep the business’s profits in the LLC in order to facilitate the growth of the business, the preferred option is a C-Corporation.

Under this form, the LLC’s profits will only be subject to the beginning corporate tax rate of 15% — which is presumably less than the member’s personal marginal income tax rates. And if any of the  members want to receive compensation, they can be paid W-2 wages for their business-related work efforts.

On the other hand, if the members of the LLC want to take all or some of the profits out of the business, the preferred election is an S-Corporation. Each member can receive his or her pro rate share of the LLC’s total bottom line profit as distributions of profit (taxed at their respective individual marginal income tax rates, but not subject to Self-Employment Tax).

All three of these options can have big advantages, depending on how much income you personally want to take and how much you plan to reinvest in your business.

Because everyone’s situation is unique, you should consult with a business lawyer to determine which option is best for you.

Generally, in order to enjoy the advantages of LLC, members of an LLC will need an Operating Agreement that outlines how the LLC will be treated for tax purposes. An Operating Agreement is an agreement among LLC members that establishes the rules governing each member’s financial and managerial rights and duties.

An Operating Agreement is a declaration of the structure the member has chosen for the company, and sometimes is used to prove in court that the LLC structure is separate from that of the individual owner.

Another one of the benefits of a Limited Liability Company is that business profits are not separately federally taxed in addition to the member’s taxes. All of the profit passes through to the members, and is filed on each individual’s tax return.

This is a big advantage over a C corporation, where the profits are taxed and then distributions are re-taxed on the individuals’ returns. An LLC may still be charged state and local taxes, but in most states, the profits are not separately taxed.

 

LLCs Enjoy Credibility

Forming an LLC can help a new business establish credibility with potential customers, employees, vendors and partners because they see you have made a formal commitment to your business.

 

LLCs Can Have Any Type of Members

Unlike corporations and partnerships, an LLC has flexibility in how it operates.

An LLC, in its Operating Agreement, can decide to distribute profits in proportions other than investment percentages.

In addition, one of the advantages of LLC over an S Corp is that an LLC doesn’t have restrictions on the type and number of partners the way an S Corporation does. In fact, your members can even be foreign nationals or other companies, with no limit on the maximum number of members.

In a normal partnership, any member who wants to limit his or her liability can no longer be involved in the day-to-day management of the business.

One of the advantages of LLC is that all members are protected from personal liability without any restriction on their ability to manage and participate in the LLC.

 

LLC is Attractive to Foreign Investors

Although LLC’s are relatively new in many states of the US, they have been in operation overseas for over a century. Thus, when investors from other parts of the world are looking to invest, they are familiar and comfortable with the LLC structure.

This can also be plus when it comes to counting the advantages of LLC. In addition, investing in an LLC is less imposing than bigger corporations, so they provide a great place for foreign investors to enter the American market.

 

Benefits of an LLC vs. Sole Proprietorship

The benefits of an LLC versus a sole proprietorship is mainly that LLC members are not personally responsible for company debts.

In a sole proprietorship and partnership, the owners are personally responsible for business debts.

What this means is that if the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner’s personal bank account, house, car, etc. to make up the difference.

By contrast, if an LLC runs out of funds, the owners are usually not liable.

Further, another one of the LLC in California benefits is that it will be easier for an LLC to raise money. An LLC can accept new members by selling membership interests, and it can create new classes of membership interests with different voting or profit characteristics. Plus, one of the advantages of LLC is that investors will be assured that they are not personally liable for company debts.

Also, LLCs enjoy ease of ownership transfer. Ownership interest in an LLC can be sold to other members without disturbing the business.

On the other hand, the business of a sole proprietorship or partnership cannot be sold as a whole. Instead, each of its assets and intellectual property must be individually transferred. Also, new bank accounts and tax identification numbers are also required.

 

Benefits of an LLC for Rental Property

Benefits of LLC for Rental Property

There are some very good reasons to form an LLC for rental property.

The main advantage among various LLC advantages is that you can set up LLCs to protect your personal assets.  An LLC will protect you personally from being sued.

For example, if your tenant’s drunken cousin falls down the stairs and gets injured, you could be liable. When the cousin sobers up, he figures he can sue you. If that happens, you’d be named in the lawsuit and would have to defend your own personal assets if you don’t have an LLC.

However, if your rental property is under an LLC, only the LLC’s assets would be liable.

While insurance could also protect your rental property, the catch is that your insurance might not cover the total costs you incur. If that happens, then your personal assets may be at risk. However, this won’t be an issue if your rental property is protected under an LLC.

So if you’re ever in doubt, make sure to have an LLC for your rental property.

 

LLC Tax Write Offs

What can you write off on your taxes as LLC business owner?

Having an LLC is attractive because of the simple “pass through” tax structure it provides. This means that the business income and deductions pass on to your own personal tax return.

When running an LLC, you may be entitled to a couple of deductions that could reduce your taxable income, including: cost of goods sold, equipment and supplies, auto expenses, office costs, and miscellaneous deductions.

It’s simple: the more tax deductions your business can legitimately take, the lower its taxable profit will be. When you’re totaling up your business’s expenses at the end of the year, don’t overlook these important business tax deductions.

 

Disadvantages of LLC

Formation and Ongoing Expenses of LLCs

To form an LLC, your business lawyer will prepare and file an Articles of Organization with the state.

Many states require ongoing fees such franchise tax fees and some states will require an annual report of the LLC.

These fees are often not very expensive for small businesses, typically from $100 to $500.

Also, a few states, such as New York and Arizona, also require LLC owners to publish notice of the LLC formation in local newspapers for several weeks. This is typically a one-time fee.

 

Transfer of Ownership Could Be Harder for LLC

Ownership in an LLC can be harder to transfer than with a Corporation.

With Corporations, shares of stock can be sold to transfer ownership.

However, with LLCs, all members must approve adding new owners or altering the ownership percentages of existing owners.

 

Self-Employment Taxes: Disadvantage for LLCs

Unless you choose to be taxed like a Corporation, LLCs are usually subject to self-employment taxes.

This means that the profits of the LLC won’t be taxed at the corporate level, but will pass through to its members who will account for those profits on their personal federal tax returns.

Sometimes, these taxes are higher than they would be at the corporate level. Individual members will pay for federal items like Medicare and Social Security.

For this reason, if you do choose to form an LLC, it’s a great idea to speak to a knowledgeable business lawyer.

 

Limited Life: Disadvantage of Forming an LLC

In some jurisdictions, if a member leaves an LLC, then the LLC will cease to exist.

This is unlike a Corporation whose identity is unaffected by the comings and goings of shareholders. Members of an LLC can deal and beat this issue in the Operating Agreement which a [contract lawyer can draft for you].

 

 

Conclusion

Now that you’ve read this article about the benefits of forming an LLC, do you think it’s the right move for your business?

This article took an in-depth look at the benefits of an LLC including tax benefits and certain benefits different states offer for an LLC.

Still, that doesn’t mean you don’t have more questions before forming an LLC for your business, does it? Deciding to form an LLC is a tough decision.

This can be a tough decision because it can be critical to the future of your business. You want to be sure that you have all the necessary information before making the leap.

Email me at sam@mollaeilaw.com and I’ll help you determine if LLC is a good move for your business.

Sam Mollaei, Esq.

As a Business Lawyer for Entrepreneurs, I help entrepreneurs start their U.S. business without dealing with complicated government forms. I’ve assisted more than 2,246 entrepreneurs successfully start their business and I'm backed by more than 702 5-Star Google Reviews. If you're interested in starting your business, take the first step by requesting your Free Strategy Session on this page.

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