One of the most popular types of business entity formed by entrepreneurs here in Ohio and across the country is the limited liability company. You may be considering this type of entity as well, but you want to know more before making your final decision.
You may already be aware of the personal liability protections an LLC provides, but you may not yet understand the tax benefits of this entity.
The LLC and taxes as a partnership
The first thing you should know is that an LLC does not receive recognition from the IRS when it comes to taxation. Instead, you may choose to have your LLC taxed as either a corporation or a partnership if your LLC has two or more members. If you intend to be the only member of the entity, the IRS views the entity as separate from you even though it does not pay taxes.
More often than not, multiple member LLCs tend to choose taxation as a partnership. This structure means that the LLC itself pays no taxes. Instead, income passes through the LLC to the individual members in amounts determined by their ownership interest. The entity files an information return, and members submit a profit/loss schedule along with the member's income tax return.
If you are the only member of your LLC, the IRS considers it a sole proprietorship for tax purposes. You would file a Schedule C providing information on the LLCs expenses and income. You then report the resulting net income calculation on your personal income tax return.
The LLC and taxes as a corporation
If you earn a high income, you may want your LLC taxed as a corporation or S corporation. Through this election, the LLC pays taxes at both the state and federal levels. The LLC still operates in accordance with its operating agreement, however.
What choice should you make?
Several factors go into choosing how an LLC is taxed. It would be worthwhile to obtain more information regarding which choice would be best in your situation if you intend to have several members of your LLC.
Understanding the advantages and disadvantages of the tax aspects of this entity may help you make your decision when it comes to whether you want to make your business an LLC. However, this is only one of the aspects to consider. In order to be sure that this type of entity will best suit your needs, you may need more information from a source experienced in forming these entities and advising new businesses.