Limited Liability Companies – 4 Things to Consider When Preparing For Tax Time

Choosing the right business’s structure should be based on your particular needs. When creating an LLC, generally there are have four basic entity types you can choose from. Learn some of the advantages and disadvantages of each.
These are the four potential options. The company has four potential business forms to operate under.
• As a sole proprietorship
• As a partnership
• As a C corporation
• As an S corporation
For taxes the LLC is a pass-through entity in three of the four options above. A pass-through entity pay income taxes at the owner level. The C Corporation pays taxes at the Company Level and at the Owner Level.
Sole Proprietorship
When there is only one member in the company, the LLC is treated as a “sole proprietorship” for tax purposes, and an individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return.

One advantage of this type of entity is the return is easy to prepare. A sole proprietor reports profit/loss on a relatively simple Schedule C. This permits the owner to organize the traditional (shoebox) listing of revenue and expenses.

One disadvantage of this type of entity is the earnings from a sole proprietorship are subject to self-employment taxes, which are currently 13.3% on the first $106,800 of income. With a corporation, only salaries (and not profits) are subject to such taxes.

Partnership

When there are more two members in the company, the default tax status for LLCs with multiple members is as a partnership. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return.

An advantage of this type of entity is the options of splitting up profits and losses for the owners. Different from corporations, where earnings are divided based on each owner’s respective equity percentage, partnerships allow owners to figure the split however they want as long as they all agree to it in writing. So, for example, a partner who has a 50 percent equity stake in the business could get 25 percent of the profits and 60 percent of the losses.

A disadvantage of this entity is the earnings from a partnership are subject to self-employment taxes, which are currently 13.3% on the first $106,800 of income. With a corporation, only salaries (and not profits) are subject to such taxes.

C Corporation

To be taxed as a Corporation the LLC needs to choose to be taxed as a Corporation. Form 8832 is used for this purpose.

One advantage of the C Corporation type of entity is the availability of more fringe benefits. This type of entity offer the owners of the business better fringe benefit options.

One disadvantage of the C Corporation is that corporate profits will be subject to “double taxation”, first as corporate income and second as income to the ultimate recipient. For example, if a corporation issues dividends from its profits, it has already paid income tax on that money, but the dividends remain taxable as income to the shareholders.

S Corporation

To be taxed as a S Corporation the LLC needs to two things. First, choose to be taxed as a Corporation, Form 8832 is used for this purpose. Second, make a Small Business Election, Form 2553 is used for this purpose.

An advantage of the S Corporation is that like the LLC it receives pass through taxation. Pass through taxation simply means no federal income tax at the company level; the owners only pay tax rate at the individual level.

A disadvantage of the S Corporation are the ownership limits. In an S corporation, for example, all the owners (shareholders) need to be U.S. citizens or permanent residents. The number of owners is limited to 100 persons. Families, however, can often be counted as a single shareholder for purposes of the not-more-than-100-shareholders. The S corporation may have only one “class” of stock; no preferred stock, for example.

The following information is not intended to replace the services of a professional. Please consult a CPA or an Attorney who can better understand your particular circumstances. Trying to set up and/or operate a corporation of any kind without competent professional guidance is asking for serious trouble. Please contact us.

CPA Deerfield Beach

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Filed under Entity Choice, Tax Planning

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