You can either be tax-advantaged or disadvantaged. That is why you will find it in your interest to focus on the tax advantages of LLC businesses.
Before we extol these benefits, it is helpful to define an LLC and explain why it is a popular business entity.
LLC is short for limited liability company. This type of business entity is a great way to establish a start-up, as it provides several benefits.
These benefits extend to liability protection and savings on taxes.
- LLC Firms Allow Business People to Enjoy More Flexibility
- LLC Companies Include Leasing Assets or Deducting Costs
- LLC Companies Allows for Pass-through Taxation
The IRS defines an LLC as a business structure that falls under the regulations of each state. Therefore, different states may have different rules in place for forming an LLC. The owners of an LLC are called members.
Because most states in the U.S. do not limit ownership, members of LLCs are classified as corporations, other LLCs, individuals, or foreign entities.
You can have an unlimited number of members or set up an LLC as a single-member LLC. Single-member LLCs, as the name suggests, have one owner.
Banks or insurance companies cannot set themselves up as LLCs.
To learn more about establishing an LLC, you can email email@example.com
To appreciate the tax benefits of forming an LLC, you need to remember 3 important things. The following information shows you why these incentives can benefit you both personally and commercially.
Important Point Number 1: Tax Advantages of LLC Firms Allow Business People to Enjoy More Flexibility
Did you know that, by forming an LLC, you can choose how you are taxed? This is one of the major tax advantages of LLC firms, but also frequently misunderstood.
For example, you can file your taxes as a disregarded entity. In this instance, you are treated like a sole proprietor.
As a result, your LLC income is treated as personal income and you are not taxed twice as a proprietor.
You can also choose corporate taxation. In this case, you are taxed at the lower corporation rate, up to $75,000. File IRS form 8832 to select this option.
Both these methods can reap big benefits. It just depends on how much you want to make and how much you plan to reinvest in your company.
If an LLC is owned by two or more people, it is treated, for tax purposes, as a partnership. Unless the owners decide to opt for corporate tax treatment, they are taxed personally.
To learn more about this LLC taxation, talk to an accountant and ask me, as well, as about the legal and financial process.
You can contact online anytime. Email firstname.lastname@example.org today.
Important Point Number 2: Tax Advantages of LLC Companies Include Leasing Assets or Deducting Costs
Tax advantages of LLC companies also include the leasing of personal assets. In this instance, you can lease assets you personally own to your corporation.
For example, let’s say you run a home office. You could set up your LLC so the entity can lease the office from you (the person).
Using this method allows you to create an expense that you can write off as well, through your LLC, on your taxes. It also adds more income to your personal bottom line.
To make this plan work, you need to draft a formal lease agreement to legitimize the leasing expense. Plus, you can also deduct all your business expenses.
Therefore, once you form your LLC, make it a practice to keep all receipts.
Important Point Number 3: The Tax Advantages of LLC Companies Allows for Pass-through Taxation
One of the major tax advantages of LLC formations has to do with pass-through taxation.
Pass-through taxation is beneficial, especially for small businesses, as they are taxed only one time.
Instead of taxing your income multiple times, you are only taxed once, allowing more money to remain with your business.
Pass-through taxation prevents double taxation, where a business is taxed on both a personal and business level.
If you don’t form an LLC, taxes are taken on income when a customer buys a product or service and, again, through the business, when the money is included in the owner’s equity.
Therefore, an LLC represents a pass-through entity that combines the elements of a corporation and partnership. In these instances, the business is owned by one or more people.
These explanations may sound rather confusing at first, but once you understand the tax advantages of LLC firms better, you will see the wisdom behind forming an LLC.
What the Facts Say About the Tax Advantages of LLC Pass-Through Taxation
According to the Brookings Institution, a number of facts show why businesses enjoy the tax advantages of LLC pass-through taxation.
In the U.S., most businesses are pass-throughs when it comes to taxes. In fact, the data reveals that 95% of companies are pass-throughs while the remainder were formed as C-corporations.
In addition, out of those businesses, about 99% were small, or received $10 million or less in income.
However, not all pass-throughs are small companies. Many larger companies also take advantage of pass-through taxation.
In fact, pass-through businesses now earn most of the business income in the U.S.
Therefore, it is not surprising that pass-through companies pay lower tax rates than C-corporations. This fact, alone, inspires some businesses to un-incorporate so they can organize a pass-through.
As a business, you have a large number of options from which to choose when structuring your company.
These choices include how you distribute your business income in the form of profits, capital gains, or wages. Because of this fact, most business owners are motivated to avoid any kind of excess tax.
The Brookings Institution adds that the expansion of pass-through companies has led to eroding payroll and corporate revenues.
Pass-throughs have widened the tax gap as well. This recess has resulted from the underreporting of income or paying too little tax.
You don’t want this to happen to you. You still want to comply legally and financially, especially when it comes to paying tax.
I can help you take advantage of the tax incentives that go along with owning an LLC. Email email@example.com for all the details today.
What Happens Next?
Are you a start-up that wants to enjoy the tax advantages of LLC companies? If so, you are not alone. Forming an LLC is good for business.
Not only will you avoid paying extra taxes, you will protect your personal assets as well.
Learn more about these benefits today. Contact me now and let’s set you up as an LLC. Email firstname.lastname@example.org to get your business off the ground.
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