One of the first considerations that you need to make when starting a business is what you’re going to register it as.
There are many different forms that a business could take but the LLC is one of the most popular.
Why? Because it offers a variety of benefits that you can’t get with other forms of incorporation, such as a partnership or a sole proprietorship, particularly when it comes to taxes and liability.
Read on to find out more about what an LLC has to offer.
What is an LLC?
LLC stands for limited liability company and it’s a way for you to legally register or incorporate your business. All you need to set up an LLC is to file an Articles of Organization and pay the designated fee to the state.
Tax Advantages
The owner’s income determines an LLC’s tax rate. The higher the owner’s income is, the less the LLC has to pay in taxes.
For instance, there’s a 34% corporate tax rate for businesses that make $75,000, whereas you’re only required to pay 25% as an individual who earns the same amount. However, the personal income of a business owner can also determine the tax rate.
Double taxation isn’t uncommon among corporate owners but an LLC owner is exempt from this. That’s because corporate owners are required to pay dividend income tax in addition to tax paid based on corporate net income.
The good news is that LLCs aren’t required to pay corporate franchise taxes in most states whereas corporations must pay this tax no matter where they’re located.
It’s worth checking your state regulations to make sure that you’re in the clear or else you might end up needing tax resolution services for owing back taxes.
Tax Disadvantages
All LLC members are required to pay tax on the profit that they receive as part-owner of the company.
They must pay this amount regardless of whether or not they’ve received a part of those profits. On the other hand, corporation owners aren’t required to pay taxes on profits.
Depending on the state where you live, you may not be required to pay property tax if you own a corporation but you will be required to if you have an LLC because it’s an entity. LLC owners must also pay self-employment taxes for Medicare and Social Security.
In fact, LLC owners must pay both the employee and owner portion of these taxes while corporate owners are required to pay half.
Conclusion
Tax requirements differ from company to company, depending on performance and the state in which the company is incorporated.
The more profitable a company becomes, the more likely its tax situation will change. Hopefully, this article has provided you with useful information that will spark a well-informed and productive conversation with your tax advisor.
This will make it easier to make beneficial decisions about the incorporation of your business and how it affects its future and yours.
