Have you decided that a limited liability corporation (LLC) is the best structure for your business? Before moving forward, it’s vital to have a thorough understanding of the tax implications of this particular business structure. This allows you to make the necessary preparations for filing the proper documents and taking advantage of the tax benefits afforded by an LLC.
Why Set Up An LLC?
One of the primary reasons why business owners go for LLCs is because this structure offers adequate protection for their personal assets. Basically, your personal property cannot be seized by banks and other lenders in case your company accumulates bad debts. This holds true unless you sign a personal guarantee to finance your new company. Another advantage is that an LLC allows owners to enjoy lower tax rates, which means you can increase your bottom line.
How Do LLCs Pay Taxes?
The most important thing to understand is that LLCs use flow-through taxation. This means that an LLC doesn’t pay taxes itself. Instead, the net income of the business is passed down to the owners of the company, who are called members in an LLC. Their personal tax returns reflect the amount of tax coming from the income generated by the company. The tax rates may vary depending on the number of owners of the LLC.
For single-owner LLCs, taxes are paid by filing Form 1040. Partnership LLCs, meanwhile, need to file taxes using Form 1065. An online legal service can help with filing taxes should you encounter any problems. In general, however, LLCs benefit from a simpler taxation process than a corporate structure.
Many experts also recommend choosing an LLC to avoid double taxation. When you set up a corporation, you are required to pay taxes at the corporate level. But as a shareholder, you also need to pay taxes when you receive dividends from the company.
What About Taxing The Losses?
When talking about losses, corporations may have a slight edge over LLCs. The reason for this is that you most likely lack the ability to deduct all losses because of your limited personal liability. There’s a chance you might end up paying higher taxes than you would if you had elected to set up a corporation. Also, it’s worth noting that LLCs may be charged additional taxes in many states. In most cases, this comes as an annual flat tax. Some states may require more than one annual fee depending on the net income of LLCs.
Lastly, you should make it a habit to keep up with the tax developments, both on the federal and state levels. A minor change in the rules and procedures may have a major impact on your bottom line. You always have the option of working with legal professionals to ensure that you abide by the rules and pay the right taxes. By taking the time to understand how LLCs pay taxes, you can better decide whether it’s the right structure for your startup company.