The Surprising Tax Advantages Of Starting An LLC
Setting up your own business can be overwhelming, but it may seem that much more challenging when you have to choose from the various forms of business models. Of course, a corporation and a limited liability company aren't really business models, per say. An LLC, or limited liability company, is often considered to be an especially beneficial form of business for a startup company. These types of businesses are easier to set up. But what is an LLC and what are the tax advantages of choosing this option?
What is an LLC?
Depending on the number of owners, the IRS automatically sees a LLC as a "disregarded entity" or partnership. This kind of business structure brings the limited liability of the company's owners together in much the same way a corporation would have, with that of the pass-through taxation that a partnership would have. LLC advantages in this area involve minimal taxes with generous legal protection.
LLC advantages with taxes
LLC advantages involving taxes include only filing for taxes once, reduced tax rates, and no double taxation. An LLC is only taxed once regardless of the number of owners. The net income of the business is taxed via a single owner of the company and in some cases the owner can file taxes for the business through their own personal tax return. Depending on the total income of the LLC and the owner, the tax rates of the company may be lower than that of a corporation. This is because an LLC's tax rate is typically figured according to the personal tax rate of the owner. A personal tax rate is often reduced significantly in comparison to that of a corporate tax rate. In addition to the LLC benefits of reduced tax rates, an LLC doesn't have to pay a double taxation as a corporate owner does. Corporate owners pay taxes on their dividend income as well as their corporate net income. An LLC on the other hand does not have to do this. It should be noted that laws regarding the taxation of LLC varies from state and state. What one state does not require an LLC or corporation to pay may be required by another. If you are considering forming an LLC or have questions regarding the benefits of an LLC, be sure to check with the state law requirements for this business option before making a decision.
How to Form an LLC?
Forming an LLC, just like maintaining it, is rather simple. After you decide to form an LLC, Articles of Organization must be filed with the state of your choosing, and initial fees must be paid. Once the Articles of Organization are filed (or even prior to that event), the owners of an LLC should have an organizational meeting where an Operating Agreement is adopted, interest certificates, if any, are distributed and other preliminary matters are discussed. An LLC Kit includes all of the information and paperwork to make this process easier.
- Newspaper Publication: In addition to the simple procedures above, three states require an announcement of the fact that an LLC has been formed to be published in a newspaper or several newspapers. The states that require publication for LLCs are New York, Arizona and Nebraska.
- Federal Tax ID Number: A Federal Tax Identification Number, also known as an Employer Identification Number or EIN, is required for an LLC to obtain a bank account and pay federal taxes. An EIN to an LLC is like a social security number to a person. It is the number the IRS uses to identify the business, and it must be included on all of the tax filings the business will make in its lifetime. If you now operate your business as a sole proprietorship or a partnership and are now looking to form an LLC, you must obtain a new EIN for the new entity.
- Single-Member LLCs: The IRS does allow Single-Member LLCs to qualify for pass-through tax treatment. However, taxation of one person LLCs at the state level may be different. Consider consulting an accountant to find out more.
Corporation as an LLC Member
A corporation can be a member of an LLC. This allows you to create an additional level of ownership, which is designed to create an entity that can offer such traditional fringe benefits as retirement plans and an additional level of protection from liability.
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