An LLC limits liability for managers and members and provides superior protection via the charging order. It has flexible management and flow-through taxation where profits are distributed to the members, who are taxed on profits at their personal tax level.
Running a single-member LLC as a disregarded entity allows for minimal tax filing costs, avoiding the double taxation which corporations face.
Advantages of an LLC
- Limited personal liability
- Less paperwork
- Tax advantages
- Ownership flexibility
An LLC is formed through the state by filing Articles of Organization and paying a fee.
Taxation of LLCs
Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs can choose to be taxed as partnerships, C corporations, or S corporations, with profits distributed to members who pay taxes based on personal rates.
LLCs can write off expenses as deductions to lower income or business taxes owed. For pass-through LLCs, deductions are claimed on personal returns.
Popular for startups, an LLC lets owners be called “members” and provides protection for members’ personal assets from business debts or lawsuits.
How LLCs Save on Taxes
Single-member LLCs avoid double taxation of corporations as they are considered a "disregarded entity."
Sole proprietorships and single-member LLCs, seen as "pass-through entities" by the IRS, pay no corporate taxes. The income and expenses pass through to the owner’s return.
Calculating LLC Taxes
To calculate LLC taxes, include gross income, effective tax rate, deductions, and savings. Consultation with legal experts can provide the necessary information to properly account for taxes.
LLC Tax Strategies
One of the biggest tax advantages of an LLC is avoiding double taxation. Owners don’t pay corporate federal income taxes as the IRS considers LLCs “pass-through entities.”
Owners pay themselves from a single-member LLC by making an owner’s draw, reported with Schedule C of their personal tax return (IRS Form 1040).
An LLC can save by taking advantage of business-related deductions. To determine if a switch to an S Corp tax classification is beneficial, owners can use the S Corp calculator to assess potential tax savings.