We’ve all heard the old saying about death and taxes. Both are inevitabilities, and for business owners, they warrant some advanced planning.
With regard to taxes, it’s particularly important to know how your company’s legal structure impacts your obligations to the IRS.
For instance, if you register your business as an LLC, what will that mean for your tax burdens?
LLCs: Background & Overview
First, it may be helpful to cover some LLC basics.
LLC stands for Limited Liability Company, and represents one of the most popular structures for small businesses in the United States.
What makes the LLC distinctive is that, unlike with a Sole Proprietorship, you’re actually creating a new legal entity.
The LLC is its own thing, distinct from its owner. As such, you can keep your business assets and liabilities in one bucket, personal assets and liabilities in another.
Why does that matter? For one thing, it means robust personal wealth protections for business owners.
The money in your personal or family bank account is off the table to creditors or to lawsuits brought against your business. There are also some big implications for your taxes, but more on that in a minute.
Registering your business as an LLC requires you to fulfill just a few basic steps:
- Choose a name for your business: Your LLC must have a name that’s not already in use by another LLC in your state.
- Select a Registered Agent: You’ll need to appoint someone who can receive legal correspondence on your LLC’s behalf. You can serve as your own Registered Agent, or hire a third-party service like Northwest Registered Agent. (See also: Is Northwest Registered Agent legit?)
- File your paperwork: For your LLC to be recognized by the state, you’ll need to file Articles of Organization, which establish your new legal entity. There is a small fee associated with this, which can vary by state.
- Create an Operating Agreement: This document outlines responsibilities and profit sharing between you and your business partners.
With these basic steps, you can get your LLC up and running. But the question remains: What does any of this have to do with taxes?
LLC Tax Basics
When it comes to LLC taxes, there’s an important distinction to start with: Are you operating a single-member LLC or a multi-member LLC?
Taxes For Single-Member LLCs
If you have a single-member LLC (e.g., no partners sharing business revenues with you), the government considers your business to be a disregarded entity.
What this means is that the LLC itself does not have to report to the IRS or furnish any kind of a tax return.
Instead, you simply report business revenues and expenses on your personal tax return.
If it turns out the business was profitable, then you’ll pay income taxes on the profit, at your normal tax rate.
Taxes For Multi-Member LLCs
Multi-member LLCs are also counted as disregarded entities, which means the different partners each declare their share of the profits on their personal tax returns.
However, each partner may pay a different amount to the IRS, depending on their stake in the company and their personal tax bracket.
The other big difference: Reporting your LLC income is pretty simple when you’re running a single-member outfit, but for multi-member LLCs there is a bit more paperwork required.
You’ll likely want to speak with a tax expert to determine what you need to do to file.
Corporate Tax Status
Here’s something else that business owners should know about LLC taxation: While all LLCs default to pass-through tax status, you can opt at any time to be taxed as a corporation.
If you’re running a single-member LLC, you can make this choice unilaterally. If you have a multi-member LLC, it will require you to have a vote with all your partners. The procedure for voting should be outlined in your Operating Agreement.
Electing to be taxed as an S-Corp or a C-Corp is seldom advantageous, but in select cases, mostly for large LLCs with complex tax strategies, it may be worth considering. Certainly, the flexibility afforded by the LLC is a nice benefit to this legal structure.
Payroll Taxes
Something else for business owners to keep in mind is that, when you have employees on your payroll, you also have to pay Social Security, Medicare, and related taxes.
This is usually withheld by your payroll company, as opposed to being paid on your annual tax return. Still, it’s something to keep in mind when considering your LLC tax strategy.
LLC-Specific Taxes
It’s natural to wonder whether there are any additional taxes specific to LLCs. Different municipalities can enact their own tax rates, but as of right now, the only major LLC tax is in the State of California. Here, every LLC must pay an annual flat-rate tax of $800.
Other LLC Fees
Beyond taxes, there are a couple of basic fees that LLC owners should be aware of.
- You’ll need to pay a registration fee when you establish your LLC, then an additional fee each year when you file for renewal. The amount can vary by state, and may be anywhere from $15 to $300.
- In some states, you will be required to hire a third-party Registered Agent service (as opposed to serving as your own Agent). The typical Registered Agent fee is between $50 and $300 annually, and it certainly pays to shop around for the best rate.
Conclusion: LLCs Offer Distinct Tax Advantages
The legal structure you choose for your business can have major implications for all aspects of business ownership, including your taxes.
The LLC model is beneficial in a number of ways, offering a lot of flexibility come tax time. Consider registering your company as an LLC in order to take advantage of these benefits.