Entrepreneurs have several options for structuring their business, each with unique advantages. A limited liability company is flexible, straightforward and may offer significant tax benefits. Let’s look at how structuring your business as an LLC can impact your tax situation.
Why Entrepreneurs Choose LLCs
An LLC combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection of a corporation. This blend makes it an attractive choice for many business owners.
- Limited liability protection: Owners (or members) of an LLC are generally not liable for the company’s debts or liabilities. Assets like your home and savings are typically safe if your business faces legal issues or bankruptcy.
- Operational flexibility: LLCs offer more versatile management structures than corporations. You can choose how to manage your LLC and distribute its profits among members.
- Pass-through taxation: One of the most significant advantages of an LLC is that it allows profits to pass through directly to the owners’ personal income without being subject to corporate taxes, thus avoiding the double taxation C-corporations face.
How an LLC Can Change Your Tax Situation
From a tax standpoint, LLCs are very flexible. They can be taxed like a sole proprietorship, partnership, S-corporation or C-corporation. Whichever election you make will impact how the IRS taxes your business income.
- Self-employment tax savings: By default, LLC members are subject to self-employment tax. A common alternative is to elect the LLC to be taxed as an S-corporation. This election can reduce the amount of self-employment tax you pay, as only salaries (and not distributions) are subject to payroll taxes. However, the savings may be offset by associated administrative costs or other additional taxes. For example, New York City has a higher tax rate for S-corporations than it does for unincorporated businesses.
- Qualified business income deduction: LLC owners may be eligible for a 20% deduction on their qualified business income under the Tax Cuts and Jobs Act. This deduction can substantially lower taxable income for many LLCs, though it comes with specific eligibility requirements.
- Retirement contributions: LLC owners can set up and contribute to retirement plans, such as SEP IRAs or Solo 401(k)s, which can provide substantial tax benefits. Contributions to these plans are often tax-deductible, reducing your current taxable income while you build a retirement nest egg.
Maximizing Tax Benefits With an LLC
To fully leverage an LLC’s tax benefits, it is critical to make the most beneficial entity election from the start.
- Hire professionals: Consider working with an experienced accounting team that understands the nuances of LLC taxation. They can help you identify potential deductions, optimize tax savings and ensure compliance with tax laws.
- Stay informed: Tax laws can change, so you should keep your finger on the pulse of new regulations that might affect your LLC. Regular consultations with a tax advisor can help you stay ahead of these changes with expert advice.
Why Raines & Fischer?
At Raines & Fischer, we understand the complexities of business taxation and enjoy guiding entrepreneurs through structuring LLCs. Our expertise in tax planning and compliance lets you focus on growing your business while we handle the intricacies of your tax situation.
Our founding partner, Alan P. Raines, Esq., is also a practicing attorney. He can solve legal and accounting issues associated with forming and running your business, enhancing your financial stability and growth potential. Contact us today if you’re considering forming an LLC and need expert advice to secure a prosperous future.
