Tax Benefits Of Starting An Llc

Advantages Of An Llc For Investors

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• Limited Liability Company Tax Benefits

Limited liability companies are a relatively new entity in American law. Wyoming was the first state to enact provisions for LLCs in 1977. LLCs combine principles of partnerships with the liability protection benefits of a corporation. This hybrid gives investors and managers more flexibility than a corporation, but with some of the tax flexibility advantages of a partnership.

Estimating And Paying Income Taxes

LLC members are considered self-employed business owners rather than employees of the LLC so they are not subject to tax withholding. Instead, each LLC member is responsible for setting aside enough money to pay taxes on that member’s share of the profits. The members must estimate the amount of tax they’ll owe for the year and make quarterly payments to the IRS — in April, June, September, and January.

Should You Switch To An Llc

Some professionals advise that the tax benefits of creating an LLC arent worth it until youre making a healthy amount of money. However, that completely overlooks all the other benefits of starting an LLC.

Limiting your liability is reason enough to form an LLC. An LLC also boosts your credibility and helps you qualify for business loans. While it might not be worth it in terms of tax write-offs, those benefits are hard to ignore.

Plus, its easy to form an LLC. You can form an LLC on your own if youd like, though its better to work with a professional to ensure you get it right. Its relatively cheap, too. Youll pay a few fees, but thats it.

So, if you asked us whether you should form an LLC, wed say: Yes. Protect your personal assets, reap the tax benefits, and make your business legit.

However, were not tax professionals nor lawyers, so consult with one of those before making any legally-binding decisions. Better yet, talk to a finance-savvy tax attorney who can help you with regulations and finances.

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Limited Liability Company Vs A Sole Proprietorship

One of the key benefits of a limited liability company versus the sole proprietorship is that a members liability is limited to the amount of their investment in the LLC. Therefore, a member is not personally liable for the debts of the LLC. A sole proprietor would be liable for the debts incurred by the business. This liability, however, is dependent upon following the rules associated with an LLC. If you treat the LLC the way you would a sole proprietorship, you lose the liability protections.

For example, creditors can go after a sole proprietors home, car, and other personal property to satisfy debts, while an LLC that is properly maintained can protect the owners personal assets.

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What Are The Disadvantages Of Operating As An Llc

There are some drawbacks to choosing an LLC as your business entity:

• There are exceptions to personal liability protection, such as instances of fraud or corporate malfeasance.
• While corporate taxes are usually bypassed, you may owe self-employment taxes.
• It may be difficult to transfer ownership compared to other options like C corporations, which have an unlimited number of shareholders.

Business owners who are unsure of which business structure to choose could benefit from legal advice from a lawyer or tax professional who is well-versed in small businesses.

See our state specific guides for California LLC, Texas LLC and Florida LLC.

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The Disadvantages Of An S Corp

The upside of an S Corp election is usually reduced corporate taxes. The drawback? Compared with continuing to work for yourself as a sole proprietor, it can be more complex. After organizing your business as an LLC, you must file the forms with the IRS.

Taxes also get more complex, because you have to pay yourself a regular paycheck and deduct payroll taxes throughout the year. Youre also required to pay quarterly estimated taxes for the business. At tax time, though, you still only have to file a personal income tax return.

Most, but not all, states recognize S Corp tax status. If youre in a state that doesnt, youll file taxes differently for federal and state, and that could get complicated.Youll probably want to enlist the help of a lawyer and accountant once your business is ready for this structure. Or sign up with Collective, and well handle all the details for you.

Faqs On Sole Proprietorship Vs Limited Liability Company

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This article was originally written on December 3, 2019 and updated on December 1, 2022.

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Choosing The Right Business Type Is Essential To Your Company’s Success

• One of the first decisions a business owner must make is what structure they want to incorporate their business under.
• LLC owners must pay self-employment taxes for all income. S corp owners may pay less on this tax, provided they pay themselves a reasonable salary.
• LLCs can have unlimited members, while S corps are limited to 100 shareholders.
• This article is for entrepreneurs who are deciding whether to structure their business as an LLC or an S corporation.

When starting a business, you can choose from several business entity types. Limited liability companies and S corporations are popular options, but they differ in many ways, including taxes and management structure. Sometimes, a business may be both an LLC and an S corp. Heres what you need to know about these business types and their differences before you decide which is right for your business.

Disadvantages Of Forming An Llc

With an LLC, you have the following drawbacks as well:

Cons

• State-related paperwork will be required, including any specific industry licensing.
• Annual state filings will be required as well, including any specific industry licensing fees that are required.
• Besides paying personal federal, state, local and the self-employed version of FICA taxes, you might also be required to pay state business taxes and unemployment taxes.
• Costs for completing the tax return of an LLC may be higher than that of a sole proprietorship.

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More Success Equals More Entities

For highly successful traders, some financial advisors may suggest forming a business structure that includes multiple entities, as a way of maximizing the tax and protection benefits afforded to the business. Even though the actual structure is determined by an individuals financial goals, this type of legal business structure usually includes a C corporation, which exists to be the general partner or managing member of several limited liability companies. In this way, extra income can be transferred to the corporate entity through a contracted management fee in order to take advantage of additional tax strategies available.

For example, to fund college expenses or to give children money tax-free, family members can become employees. The corporation can then take advantage of deductible salaries and educational expenses, while also building Social Security and Medicare accounts. Medical reimbursement plans can be created to fund all types of elective health care procedures and medical insurance premiums. Retirement accounts such as individual retirement accounts and 401 plans can be transferred into a 401a, a type of pension fund that allows annual contributions and can never be accessed by creditors or through a legal claim. Because the corporation pays taxes on net income, the goal is to pay as many expenses as possible with pretax dollars and to minimize taxable income.

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Ease Of Forming An Llc

Creating an LLC is a much simpler process than creating a corporation and generally takes less paperwork. LLCs are under the jurisdiction of state law, so the process of forming an LLC depends on the state where it is being filed. Most states require filing articles of organization with the secretary of state, and some states allow for them to be filled out online. A few states require an additional step of filing a public notice, often in local newspapers. Once these steps are completed, the LLC is officially formed.

Once an LLC is formed, itâs good business practice to set out the roles and responsibilities of the members. The members are individuals with an ownership interest in the LLC. Most LLCs use an operating agreement to define these roles. Drafting an operating agreement is not necessary for an LLC to be valid, but it is a prudent course of action. If no operating agreement is created, then an LLC is governed by the default rules contained in state statutes.

The operating agreement sets forth the rights and responsibilities of the members. It can define the business relationship and deal with issues of capital structure, allocation of profits and losses, provisions for the buyout of a member, provisions in case of the death of a member, and other important business considerations.

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The Tax Advantages Of Llcs For Startups

From taxes to how much of your personal assets are at risk, you’ll want to pick a business structure that gives you the right balance of legal protections and benefits. Thats where a Limited Liability Corporation comes in.

Unlike a sole proprietorship or partnership, an LLC gives business owners personal liability protections for any actions of the business. Generally, LLCs provide certain tax benefits and greater flexibility, and they also come with a lot less paperwork than C corporations and S corporations.

When it comes to taxes and saving your business money, is an LLC the right structure for startup owners like you? Let’s dig in to weigh the pros and cons.

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What Are You Waiting For

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Llc Tax Forms And Llc Tax Deadlines

The exact tax forms youll need to complete your LLC taxes depend on three things:

Here are the commonly used LLC tax forms and corresponding deadlines:

Note that if a tax deadline falls on a Saturday, Sunday, or federal holiday, you can file the document on the next business day. Also, if you request an extension for tax filing, youll get an additional six months to file. For example, tax filers who request an extension to file Form 1065 will have until September 15 to do so. Use Form 4868 to request an extension if youre a single-member LLC taxed as a disregarded entity. In all other cases, use Form 7004 to request an extension on business tax filing.

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Benefits Of S Corp Vs Llc

Technically, LLC and S Corp arent opposing options. An S Corp is a tax status rather than a type of business. You have to form an LLC before you can elect to be taxed as an S Corp.

Here are a few things to consider if youre deciding whether to elect S Corp status or simply form an LLC and pay taxes as a sole proprietorship.

Tax Considerations For An Llc

When deciding how you want your LLC to be taxed, its important to consider all of your possibilities in order to make an informed decision. The right tax method for you might change based on what your biggest need is and how that need is treated for taxes. Here are the most important tax considerations when you form an LLC:

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Can You Switch Between An Llc And An S Corp

Yes, you can switch between an LLC and an S corp. In fact, your business can be both at once the two are not mutually exclusive.

Filing for S corp status at the federal level in no way eliminates your state-level LLC status. You can even revoke your S corp status after you elect to file taxes under this classification. However, this requires more paperwork, so try to make decisions youre unlikely to reverse.

Forming A Sole Proprietorship Vs Llc

Lets look at the distinctions of creating an LLC vs. a self-employed business. Forming a sole proprietorship can be as simple as getting to work. Depending on what kind of work you do, you may have to obtain licenses, permits, zoning clearances, or other permissions from your local government. If you so desire, you can form a legal entity and file an assumed business name, and to make tax season more bearable, obtain an EIN .

Forming an LLC is a little more involved, but still a relatively simple process. Youll need to choose a legal name your LLC, and be sure to check your proposed name before going to file youll want to be sure youre choosing a name unique to your business and and check with an attorney before using a name others have protected with a trademark. Youll also need to choose a registered agent. This could be yourself if youre a single-member LLC, or one of your business partners in the case of a multi-member LLC.

Youll then need to file articles of incorporation and create an operating agreement, as well as paying a filing fee. Having a business plan in place can make aspects of this step much simpler as you form an LLC. In some states, youll be required to obtain your EIN for tax purposes.

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Disadvantages Of A Corporation

There are significant disadvantages to creating a corporation regarding the amount of complexity involved. It requires a great deal more paperwork, meeting many more guidelines, electing a board of directors, adopting bylaws, having annual meetings, and creating formal financial statements. They generally have more burdensome record-keeping requirements than LLCs.

There is also the issue of double taxation for corporations. This refers to taxes being paid twice on the same income. This is because corporations are considered separate legal entities from their shareholders. Thus, corporations pay taxes on their earnings, while their shareholders also pay taxes on any dividends that they receive from the corporation.

What Is The Self

You have to pay taxes on your total net earnings every year. For self-employment income earned in a particular year, the self-employment tax rate is 15.3%.

The rate consists of two parts: 12.4% for Social Security and 2.9% for Medicare .

The Social Security portion is capped at a maximum amount, which changes each year. If your net earnings exceed the maximum that that year, you continue to pay only the Medicare portion of the SECA tax.

How does that compare to a W2 employee?

The 2018 Federal tax bracket for a married filing jointly couple earning $100,000 is 22%. The 2018 New Jersey tax bracket for a married filing jointly couple earning $100,000 is 5.53%

That means a W2 employee is paying a total tax rate is 27.53%, not counting deductions to keep things simple, compared to just 15.3% for a self-employed person. How does it compare? It doesnt. You shouldnt need any more convincing to start your own business.

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What Is An S Corp

An S corporation, also called an S corp or an S subchapter, is a tax election that lets the IRS know your business should be taxed as a partnership. It also prevents your business from incurring corporate-level double taxation. To become an S corp, your business must first register as a C corporation or an LLC.

In an S corp, the business owners are called shareholders. As an owner, you are considered an employee of the business and must pay yourself a reasonable salary. An S corps profits, losses, deductions and credits are taxed at the shareholder level.

To qualify as an S corp, your business can have one to 100 shareholders. Your business also must be located in the U.S., and you must file with the IRS as an American corporation.