Entrepreneurs have an extensive list of options to choose from when it comes to business structures. C-Corporations, S-Corporations, sole proprietorships, partnerships, limited liability companies (LLCs) – each option has its pros and cons in terms of tax treatment.
In this article, you will discover feasible methods to avoid paying a hefty amount of taxes in a limited liability company (LLC).
Explaining Limited Liability Companies (LLCs) – What You Need to Know
A limited liability company (LLC) is a business entity that combines the good aspects of corporations and partnerships. Designed to protect its members (owners) from business liabilities, LLCs offer superior protection against judgments, creditors’ claims, and issues that may affect the members’ assets.
When the title of an asset is transferred to the name of an LLC, it is no longer considered part of the original owner’s estate. Similarly, the assets held in the name of members are not exposed to creditor claims and judgments against the business.
Another advantage of LLCs is the flexibility to form and run the business. While corporations offer limited liability protection, the number of formalities required is often overwhelming. LLCs are easily manageable and inexpensive.
The members of an LLC often have to pay a self-employment tax, which includes Social Security and Medicare. This tax is applied at a flat rate of 15.3%, but it may have a significant impact on smaller LLCs. However, several other write-offs compensate for this drawback.
How Can an LLC Avoid Paying Too Much Taxes? – Efficient Tactics
LLCs also enjoy the flexibility to select the tax treatment the legal entity will receive from the Internal Revenue Service (IRS). Depending on the circumstances and goals of the members involved in the business operation, they can elect S-Corp or partnership status for tax purposes.
By default, LLCs are “pass-through entities,” as all profits and losses of the company pass through the entity directly to its members’ tax returns. Accordingly, members do not need to file taxes on behalf of the company, as filing a personal tax return is sufficient.
Single-member LLCs receive the same tax treatment applied to sole proprietorships, while multi-member LLCs receive the same tax treatment applied to partnerships. If the members want to elect another tax status, it is possible to elect to be treated as S-Corps, which also enjoy pass-through taxation.
Another benefit granted to LLCs is the possibility to deduct taxes on the net business income earned by the sole member or multiple members of the company.
Since the enactment of the Tax Cuts and Jobs Act of 2017, the Qualified Business Income Deduction allows LLC members to deduct up to 20% of their net business income. It is worth noting that this deduction is available after the deduction of business expenses, which adds up to the write-off list.
Well-known for offering benefits similar to corporations, LLCs allow members to avoid double taxation. In a corporation by default (C-Corp tax status), the shareholders must file taxes at the corporate and the individual levels when they receive dividends, referred to as “double taxation.”
Do You Want to Avoid Taxes on Your LLC? – Immediately Contact an Expert CPA
It is perfectly possible to avoid taxes on an LLC while ensuring full tax compliance with IRS regulations. Waste no time – contact Edward D. Quilca, CPA by calling (786) 310-5582 or emailing [email protected] to find the best tax-saving strategy for your LLC.
