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3 Major Tax Benefits of an LLC (Don’t Miss Out!)

Tax Benefit of LLC

Do you know the tax benefits of LLC entities? If not, you can find out more about how to take advantage of reduced taxes by forming an LLC. 

You may have several questions that need to be answered about LLC tax benefits. Most people ask the following: 

What exactly is an LLC?

How can I benefit from forming an LLC?

Why is an LLC formation better than remaining a sole proprietor?

To answer the above questions and help you understand the tax benefits of LLC formations, the following explanation should give you a clearer understanding.

An LLC stands for limited liability company. This business set-up is more personal than a corporate set-up, as the owner reports all of his or her profits and losses on their individual tax return.

You can benefit from forming an LLC, as you do not need to pay any federal or state taxes for this business entity. The Internal Revenue Service calls an LLC a pass-through entity, as the profits and losses run through to the owner’s tax return. This term is also used to describe taxation for sole proprietorships and partnerships. 

Forming an LLC is better than remaining a sole proprietor, as it gives you a more professional standing. People view an LLC as a separate and professional business when these three letters appear after a company’s name.

Many LLC owners are self-employed, which means taxes are not withheld from their income. The law requires that an LLC owner make estimated tax payments quarterly to the state and IRS. 

I can help you with forming an LLC after you read the following article. If you would like to arrange a time to meet and discuss this business formation now, simply email me at sam@mollaeilaw.com.

 

Why Do the Income and Tax Benefits of LLC Formations Make Them Attractive?

The income and tax benefits of LLC formations make them attractive, as they offer more tax and income flexibility. Limited Liability Companies combine the advantages of both corporations and partnerships

An LLC features the limited liability advantages of a corporation and combines them with the pass-through tax status and income distribution flexibility of a partnership.

 

The Three Major Advantages of an LLC

Setting up an LLC for tax and income purposes makes is appealing for the following reasons.

Limited Liability

As the name implies an LLC provides the owner with limited liability for his or her company debts. Limited liability means that your personal assets cannot be touched to cover business claims, lawsuits, or debts for an amount more than what has been invested in a business. 

An LLC is an attractive entity, as an investor’s personal assets, such as his or her home or car, cannot be taken by creditors during a slump in business or bad economic times. While a personal injury lawsuit may bankrupt a company, it still cannot touch an LLC owner’s personal assets or income.

Flexible Income Distribution

An LLC has the benefit of the flexible distribution of income. Therefore, profits and losses can be allocated more easily for taxation. 

Shareholder income and shares are equally allocated in a corporation. However, in an LLC, each member decides on how to divide the income. This division is based on the partnership distribution rules set up by the IRS.

While you cannot pay yourself wages as an owner, each LLC member may write a check to himself or herself from the company’s checking account. This flexibility permits each partner the opportunity to receive a guaranteed payment, which allows him or her to receive tax-friendly advantages. 

To ensure that you keep track of profits and losses, and pay the proper tax, it is important to have a separate business bank account and personal bank account. Doing so will allow you to distribute your income so that you can readily show your personal and business holdings.

If you would like to know more about some of these fringe benefits, I can answer your questions. All you need to do is contact me via email at sam@mollaeilaw.com.

Double Taxation

Because the Internal Revenue Services refers to an LLC a pass-through entity, the business is considered distinct from the investors or owner. This means you do not have to pay taxes (personal and business) twice or experience double taxation.

Double taxation means that the company profits of an investor and the corporation are taxed. However, in an LLC, the initial profits that are made are not considered income. As a result, you do not have to pay self-employment taxes on these profits. 

In an LLC, the managing member’s share of the company’s profit is deemed as earned income and is taxed for self-employment. 

 

What Are the Tax Benefits of LLC Single-member Businesses?

The tax benefits of LLC Single-member companies enable an entrepreneur to report income one time on his or her personal tax return. The profits and losses are not taxed for the LLC,

How You Will Report Your Taxes

  • If you are the sole owner of an LLC, you are considered a disregarded entity for income tax purposes. In turn, you will report all profits and losses on IRS Schedule C, which is submitted and attached to the IRS form 1040. 
  • If your business provides products or services, you must pay self-employment taxes on the profits, and add Schedule SE.  However, if you own a passive business, (such as a rental company), you do not have to pay self-employment taxes. Instead, profits are reported on Schedule E, attached to your personal tax return.

 

What Are the Tax Benefits of LLC Multi-member Companies?

The tax benefits of LLC multi-member companies are the same as single-member LLCs. If your LLC has more than one owner, the IRS will categorize it as a multi-member LLC for income tax purposes. 

As with all LLCs, you don’t have to pay taxes on the business itself. Instead, each member of a multi-member LLC pays taxes on his or her proportion of their income on their individual tax return.

How the Tax Is Paid

  • The tax paid by each member of a multi-member LLC is directly related to his or her share or interest in the business. For example, if member “A” owns 60% of the company and member “B” owns the remaining portion, or 40%, each person is responsible for that percentage in profits and losses.
  • If you want to divide the profits and losses differently, you need to ask for a “special allocation” from the Internal Revenue Service. Partners or LLC members must pay taxes on their share of the profits yearly, even if the money remains in the bank.

Special Note: Although a multi-member LLC does not remit taxes, a partnership must file an IRS form, 1065 so the IRS can verify that each member is reporting his or her income correctly. Each LLC owner must add Schedule K-1 to Form 1040 to record his or her share of profits and losses.

The above information may seem rather complex. However, when you talk to me, I can clarify the terms so they make more sense. If you want to enjoy a more professional standing and avoid double taxation, forming an LLC makes sense.

 

What To Do Next

You can learn more about the tax benefits of LLC single-member and multi-member companies when you contact me. Schedule a time to review these advantages and upgrade your business standing. Reach me by email now at sam@mollaeilaw.com. Set an appointment so you can find out the best way to establish your business for future growth.

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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