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this is the secured entrepreneurs show and I'm your host over a day welcome and thank you for joining me here for the eighth episode of the secured entrepreneur show today I'm going to talk to you about your limited liability companies tax classification have you made the choice between partnership taxation and corporate taxation many entrepreneurs are still neglecting to take advantage of this very vital option given to limited liability companies by the Internal Revenue Service I'm aware a day protecting your business starts before you open for business in episode 7 we talked about how an LLC has a pass-through tax status which aids in eliminating the double taxation that is often accrued by corporations so now let's talk about the C and the S corporation elections that are available options to a limited liability company first you need to know that a corporation is treated like a separate taxpayer it files a tax return and pays tax on any profits if it distributors any of the profits to its members those profits are taxed again therefore in many cases entrepreneurs choose partnership taxation one of the methods to avoid double taxation is to pay all profits to the members as a salary which is deductible and the corporation has no profit on which to pay tax your LLC can elect to be taxed as a corporation most entrepreneurs will not choose this however many do find that being taxed as a corporation actually reduces their tax bill so if your endeavor is to keep money in your business rather than paying out all of its profits to the owners there is a little savings because corporate tax rates are initially lower than the individual rates that are available to most LLC owners now if your LLC elects to be taxed as a C corporation it will act as a separate taxable entity and yes it will face the possibility of double taxation if the income is distributed to business owners as dividends which would be considered personal income tax on corporate income is paid first at the corporate level and then again at the individual level on dividends but if your LLC elects to be taxed as an S corporation it will still act as a pass-through tax entity there will be no income tax paid at the corporate level as all profits and losses of the business are passed through and reported on the owners personal tax returns but here is the nugget an S corporation is only allowed to have 100 shareholders all of whom must be US citizens or residents or certain types of trusts and estates so before you decide on an election you really want to know what your long-term plans are for your company do you plan to stay small because it's easier for you to handle and control or do you plan to eventually become a very large company you'll learn a whole lot more about the pros and the cons along with all of these significant restrictions that come along with these elections in the LLC basics course that will be available to all of you shortly at a rod a consultant calm alright I'm ready to get into the next episode so please feel free to leave your comments and questions and subscribe here on iTunes and visit me Aurore a day on google+ as well as a world a consulting com that's a you are ou are a htey consulting com until next time with a rower day you are secured
Thanks for your comment Kip Golly, have a nice day.
- Keith Blagg, Staff Member
four types of LLC tax classification options to choose from from business verse family comm if you're an entrepreneur who needs to know the first steps to starting your own business for the first time you need to watch this video here you'll learn three things first you'll learn about the five different types of LLC tax classification for businesses second you'll learn the unique advantages of filing as an S corporation and finally you'll learn how to make the best decision possible to start a small business LLC with the appropriate corporate structure a limited liability company LLC is one of the most common types of business entities around despite their popularity as a business structure limited liability companies do not have their own tax classification depending on how many members are in the LLC your business can be taxed in different ways as a business owner this could drastically change how much taxable income you have at the end of the year in this video we'll cover the different LLC tax classification options you can choose from single member LLC tax classification for most single owner businesses a single member LLC is taxed as the sole proprietor business the LLC is a pass-through entity so the income will transfer over to your personal income return traditionally this classification is the default when you form an LLC as a single member if you would like to be taxed as a sole proprietorship this classification could work for you it is a common first step for businesses that are changing from a DBA to LLC multi-member LLC tax options secondly if you form an LLC with multiple members the default classification is a partnership under a multi-member LLC formation all the members are taxed like partners in a partnership entity in this situation you might have to file an additional document form 1065 partnership return of income to the IRS since the LLC doesn't pay taxes the net income or losses are transferred to the members you should have your accountant ensure that all income in a partnership taxation is calculated properly using this LLC's classification electing to tax an LLC as an S corporation next you can elect to have your LLC tax classification treated as an S corporation typically this works for single member or multi-member LLC businesses without all the additional work of maintaining S corporation status you have sufficient flexibility to distribute profits or losses to owners but you would probably have to pay yourself a salary at the advisement of a tax professional or accountant if you would like to take the best of both worlds between an LLC versus an S corporation this LLC tax classification could be perfect for you violin LLC taxes like a corporation additionally you can elect to tax LLC entities like a seat corporation using the form 8832 an LLC can be treated as a seat corporation for tax classification purposes this is less common since the LLC will no longer be treated at the pass-through entity it will be regarded as a separate entity which could result in double taxation you could end up paying taxes at the corporate level and then again on the corporate dividend although it's a less popular option you can still consider this LLC tax classification with your financial advisors if needed if you decide to form an LLC you have access to many different types of tax classifications this is one of the major benefits of an LLC structure as a single member LLC you can be taxed as a sole proprietor or corporation in a multi-member limited liability company you can classify the company as a partnership or corporation for tax purposes clearly all of these types of classifications can have various impacts on your tax obligations ensure that you have proper tax planning strategies in place when electing your LLC tax classification which tax classification will you choose for your LLC let us know in the comments below if you found this guide to LLC tax classifications helpful like this video and subscribe to Business first family below then visit business first family com for all your entrepreneurial need you
Thanks Laila your participation is very much appreciated
- Keith Blagg
About the author
I've studied infrared astronomy at Shepherd University in Shepherdstown and I am an expert in astrodynamics. I usually feel not specified. My previous job was occupational therapist I held this position for 9 years, I love talking about skateboarding and kanjira. Huge fan of Shane West I practice yoga and collect steiff teddy bears.