Taxes are faced with a shudder of fear, and even disdain. However, they do exist and cannot be avoided. Considering this, how can I make sure that my LLC pays tax that is the most beneficial to the company’s profits? Here we will define an LLC, discuss why they are so popular, and how the business structure is advantageous to the owners.
What is an LLC?
An LLC is a Limited Liability Company and it is generally seen as one of the least rigorous ways of starting a business in a way that safeguards personal assets in case the business falls into financial or legal trouble. An LLC can be owned by an individual or by many people, and these individuals are known as LLC members. Should an LLC have only one owner, then the business is known as a single-member LLC whereas an LLC owned by more than one person is referred to as a multi-member LLC.
So why form an LLC and not another business structure?
The LLC business structure has many advantages, for example:
1. Personal Asset Protection.
As mentioned above, the owners of an LLC do not have personal liability risks for the debts or legal troubles of the business. This is, of course, only in the event that no fraud or criminal conduct has taken place.
2. Pass through taxation.
An LLC’s profits are only taxed once because the profits of the business still go directly to the owners. The owners then show what they received out of the profits on their personal tax returns. In essence, this means that “pass-through” entities are taxed individually, rather than as a business. Basically, the members pay taxes rather than the business itself.This is in contrast to double taxation where the profits are taxed before they are shared among the owners and taxed again when the owners file their personal tax returns and mention their portion of the profits. This is in contrast to some other business structures where double taxation occurs. This happens when the profits are taxed before they are shared among the owners and taxed again when the owners file their personal tax returns and state their portion of the profits.
3. Simplicity.
LLCs are not only simple to construct, but also easy to maintain with little need for excess paperwork. LLCs are not obligated to appoint formal officer positions, conduct meetings every year, nor record the minutes and resolutions of the company.
4. Flexibility
There aren’t many limitations on how you choose to form the company’s ownership and management. It can have one owner or many. Should the LLC be multi-membered, it can be managed by said members (member-managed) or a manager can be appointed by the members (manager-managed). Furthermore, the LLC can choose whether to be taxed as a C-Corp or a S-Corp depending on which is most advantageous.
5. Increased credibility.
The LLC is widely considered to be a more official business structure, especially in contrast to a sole proprietorship or a partnership. The moment clients and creditors see LLC in the business name, an increased level of trust is established in your role as a credible business.
6. Access business loans
The moment that the business has been formed, the LLC has the opportunity to establish a credit history. This has the consequence of access to loans and lines of credit. Especially if you are a women-owned business, there are specific financing options.
How do the taxes work in LLCs?
In order to ascertain your LLCs tax rates, there are many things to consider. Tax requirements vary and are contingent on the type of business operations. LLC taxation takes many things into consideration, including whether the business is a single-member LLC or a multi-member LLC. There are also differences between the state taxes and the federal taxes. Be sure to read more about how to form an LLC in Texas on TRUiC’s website. They offer detailed explanations of the different types of tax and which types your specific business might have to pay.
