LLC Taxation Basics
LLCs offer tax benefits when compared to other business structures. LLC taxation as pass-through entities means profits and losses pass through to owners’ personal tax returns. This avoids the double taxation that corporations face. LLCs also create clearly defined boundaries between personal and business expenses when reporting to the IRS.
How LLCs Pay Taxes
Single-member LLCs default as sole proprietorships to the IRS. Multi-member LLCs default as partnerships. They file partnership returns but do not pay taxes; members do. LLCs can elect S corporation status, which subjects them to different rules.
Filing Rules for LLCs
You establish an LLC by filing state documents, and the federal tax treatment depends on whether there’s one owner or multiple. Entity election classifications also affect tax rules.
Tax Benefits Guide
Our LLC Tax Benefits guide explains the tax benefits of LLC formation, providing information on tax options, deductible expenses, and more. Recommended: Northwest helps businesses form LLCs for less while offering lots of value to its customers.
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Taxation: LLC owners typically pay self-employment tax on income in addition to corporate taxes, which may make LLCs more expensive to run than other business structures.
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Limited Liability Protection: An LLC offers protection, so owners’ personal assets are not at risk if sued or if the business incurs debt.
Forming an LLC in a state with favorable tax benefits can potentially reduce overall tax liability and increase profitability, offering flexibility and protection for small business owners.