One of the biggest tax advantages of a limited liability company is the ability to avoid double taxation. The Internal Revenue Service (IRS) considers LLCs to be “transfer” entities. Unlike C corporations, LLC owners don't have to pay federal corporate income taxes. Establishing a taxable corporation or LLC offers significant tax advantages for professionals such as consultants or representatives of manufacturers.
A C corporation or a taxable LLC can reimburse an executive or employee for driving a personal vehicle for business purposes. If you regularly need to keep a substantial amount of profits in your LLC (called retained earnings), you could benefit from opting for corporate taxation. For example, a single owner of a New York City LLC will report the company's income on their federal and state personal tax returns. For more information, check the website of your state's Secretary of State, Department of Corporations, or Department of Revenue or Taxation. If, after deducting business expenses, the LLC generates profits for the year, the owner will owe taxes to the IRS in accordance with their personal income tax rate.
If your LLC sells taxable goods or services, you'll need to collect sales tax from your customers and remit the tax to the state or local tax agency. Working with a tax advisor can help business owners find the optimal way to file taxes that reduce their tax burden. Even if you leave the profits in the company's bank account at the end of the year, for example, to cover future expenses or expand the business, you must pay income tax on that money. Unemployment taxes are deposited quarterly, while Social Security and Medicare taxes are deposited monthly or biweekly, depending on the amount of your tax liability. The company's income and expenses are transferred to the individual members of the LLC and are listed on Form K-1 that is filed along with Form 1065 corporate tax return.
This describes how LLC profits can be transferred directly to the owner or owners, without having to pay federal corporate income taxes first. All of the LLC's profits and losses pass from the company to the LLC's owners (called members), who declare this information on their personal tax returns. If you're a small business owner or starting one, it's important to make sure your tax planning is done right. The owners of a single-member LLC report the company's income and expenses on Schedule C of their individual tax return. However, LLC members pay taxes on their share of the profits, even if the profits have not yet been distributed.
