Setting up your own business can be overwhelming, but it may seem that much more challenging when you have to choose from the various forms of business models. Of course, a corporation and and a limited liability company aren’t really business models, per say.
An LLC, or limited liability company, is often considered to be an especially beneficial form of business for a startup company. These types of businesses are easier to set up. But what is an LLC and and what are the tax advantages of choosing this option?
What is an LLC?
Depending on the number of owners, the IRS automatically sees a LLC as a “disregarded entity” or partnership. This kind of business structure brings the limited liability of the company’s owners together in much the same way a corporation would have, with that of the pass-through taxation that a partnership would have. LLC advantages in this area involve minimal taxes with generous legal protection.
LLC advantages with taxes
LLC advantages involving taxes include only filing for taxes once, reduced tax rates, and no double taxation. An LLC is only taxed once regardless of the number of owners. The net income of the business is taxed via a single owner of the company and in some cases the owner can file taxes for the business through their own personal tax return.
Depending on the total income of the LLC and the owner, the tax rates of the company may be lower than that of a corporation. This is because an LLC’s tax rate is typically figured according to the personal tax rate of the owner. A personal tax rate is often reduced significantly in comparison to that of a corporate tax rate.
In addition to the LLC benefits of reduced tax rates, an LLC doesn’t have to pay a double taxation as a corporate owner does. Corporate owners pay taxes on their dividend income as well as their corporate net income. An LLC on the other hand does not have to do this.
It should be noted that laws regarding the taxation of LLC varies from state and state. What one state does not require an LLC or corporation to pay may be required by another. If you are considering forming an LLC or have questions regarding the benefits of an LLC, be sure to check with the state law requirements for this business option before making a decision.