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. In general, the IRS doesn't tax LLC's directly. Unlike a corporation, an LLC doesn't need its own tax return.
Their earnings are disbursed to their members, who declare them as self-employment income. This structure is known as a “transferred entity”, meaning that business income is treated like members' personal income. A transfer entity is the LLC's default tax status. LLC owners can avoid paying payroll taxes by making a corporate tax choice with the IRS.
The members of an LLC can choose to have the company treated as a C corporation (C-Corp) or an S corporation (S-Corp), depending on the structure that provides the greatest advantage to the company. Generally, only business income earned by a sole proprietorship or transfer entity is eligible for the deduction. A transfer entity includes joint-stock companies, S-type limited companies, and corporations Limited Liability (LLC). An important feature of an LLC is that the Internal Revenue Service (IRS) allows business owners to choose how their businesses will be taxed.
Business owners take advantage of the accumulated profits of a C corporation or a taxable LLC to borrow from the company at a favorable interest rate. Saving on taxes is one of the main reasons why smart business owners form legal entities for their businesses. An LLC offers several tax benefits, including the simple flexibility to choose how you want the entity's taxes to be taxed. When you choose a sole proprietorship or a corporation, you have no options regarding how to pay your taxes.
A unique aspect of limited liability companies (LLCs) is their ability to decide how they will be taxed. If you're a small business owner or starting one, it's important to make sure your tax planning is done right. A Type C corporation or a taxable LLC can reimburse an executive or employee for driving a personal vehicle for business purposes. Business income transferred to LLC members is considered “earned income” and is subject to Medicare and Social Security taxes. A Type C corporation or a taxable LLC offers substantial health insurance benefits for its owners.
In some cases, opting for the transfer method generates less taxes than if you present yourself as a type S limited company and you pay corporate income tax rates. If you own a single-member LLC, you can choose to pay taxes as a sole proprietorship, partnership, or C corporation. For most small business owners, structuring a company as an LLC offers the most versatility in determining how businesses are taxed, while offering the limited liability of a corporation, but with less formality. LLCs are different; you can treat the LLC's earnings as self-employment income and file a personal income tax return. Or you can choose to have your LLC treated as a Type S corporation for income tax purposes and enjoy corporate tax benefits.
You can learn more about the rules for taxing LLC's by looking at the IRS's background on Form 3402, which covers the taxation of LLC's.
