Why LLC Business Structures
See also: Developing a Business Idea
Could Be the One for Your Small Business
Out of all the business entity types, a Limited Liability Company (LLC) is by far the most popular type of all among small business owners. But why are small business owners so fond of this type of business structure? Whenever something is popular, it is usually because of the benefits it offers, and an LLC business structure is no different. Something else that draws investors to this entity is the protection that it offers.
Let’s take a closer look at LLC business entities, what LLC tax filing involves, and whether an LLC business structure is going to be the right choice for your business.
What are the tax advantages of an LLC entity?
Have you heard the stories of how the rich seemingly “don’t pay any taxes”? Perhaps you’ve even heard those rumors of how millionaires and billionaires have tax schemes that help them skip out on paying a small fortune in taxes to the IRS. There is even a myth that the LLC business structure is the structure to go for if you want to get out of paying a lot of money in taxes. Well, unfortunately, that is nothing more than a myth.
That’s right. An LLC business structure does not have any loopholes that help you get out of paying taxes. Instead, an LLC acts as a legal entity, and its purpose is to protect you from any personal liability in the event you happen to find yourself in the middle of a lawsuit. For tax purposes, once you create an LLC, it falls under the sole proprietorship or partnership category. This is in a typical scenario. This does not mean that you are evading taxes altogether.
Ease of Formation
To begin with, LLCs are incredibly easy to form in most states. The requirements for setting up an LLC are fewer, and the process is less tedious compared to other business structures like corporations. Moreover, it’s easy to manage paperwork and keep up with important state deadlines as long as you have a reliable registered agent service helping you.
What are the tax benefits of an LLC?
One of the benefits you stand to gain by registering your small business as an LLC, either yourself or through LLC services, is the pass-through taxation.
This is how it works:
When it comes to business taxes for entities, there are two types of taxes that every entrepreneur should be aware of. The first type is the pass-through taxation. The second type is double taxation.
With pass-through taxation, all the money that your business earns will be subject to taxes. This means that even if you did not pay yourself a single cent from your business’s earnings, you will still be taxed on it.
Double taxation, as the name implies, means that you get taxed twice. Your business will first be taxed on all the income it makes. The second tax happens when you get paid from the income that you take out of your business. You get taxed on the income that gets taken too. That is why business owners love an LLC because one of the major benefits of this type of business structure is that you only get taxed once under the pass-through taxation approach.
For example, let’s say that your business made $100,000 in earnings for this financial year. Now, let’s assume that your tax percentage is 25%. This means that you will only be paying $25,000 in taxes because your business is registered as an LLC.
This is a major advantage over a lot of other business entities. For comparison, let’s look at what you would be paying in taxes if you were registered as a C corporation and your earnings for the financial year were $100,000. Your business is going to be taxed based on this income first. If the corporate tax rate is 20%, the first sum you would be paying out is $20,000 in taxes. Then you would also be taxed on what you pay yourself from your corporation. Let’s assume that you decide to pay yourself $50,000 in wages (these are called W2 wages). This will place you approximately in a 20% tax bracket. What this also means is that you will have to pay an extra $10,000 in taxes because of this personal income that you’ve accrued from your business.
In total, you would be paying close to $30,000 in taxes because you are registered as a C Corporation business entity. You see why small businesses prefer the LLC option?
Another tax benefit that you gain from registering your small business as an LLC is that you can elect to be taxed as an S Corporation.
This is how it works: S Corporations have the advantage of not needing to pay any self-employment taxes. At the same time, you are supposed to pay yourself a reasonable W2 salary. The taxes that you will need to pay would be the same as what you would have paid in self-employment taxes.
You can elect to file as an S Corporation if your business earns over a certain reasonable amount if you think that would be the best bet. You could consult a tax professional who specializes in your business structure to decide if this is the best way to go.
Tax write-offs are another advantage of operating as an LLC. This is a major benefit if you are an individual who is self-employed in your small business. You can write off certain things as part of your business expenses. Some examples of these expenses include home office expenses, traveling for business, and other business-related expenses.
Since an LLC is considered a separate entity, your business expenses and personal expenses should be separated too. This will make it much easier for you to keep track of your business expenses.
However, you want to be careful not to register an unrealistic sum on your tax write-offs or it might trigger the IRS’s suspicion. It is worth working with a tax professional if this is your first time attempting to write-off your taxes. This process is much easier if you keep track diligently of your expenses from the very beginning.
Have a separate bank account for your business expenses and track every expense carefully, no matter how small the sum may be. It will make it a lot easier for you and your tax professional to work through your tax documents to make the filing process a stress-free one.
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