Starting a business is not easy. You need to take care of a number of things from brainstorming business ideas to finding employees, marketing your products or services, and tracking cash flow.
However, one of the most important decisions that you’ll make as a business owner is to choose a legal structure for your business. The business structure you choose influences everything from taxes to your personal liability as an owner, and the overall profitability of your business.
You should choose a business structure that provides you with liability protection, flexibility, and tax benefits.
From Sole Proprietorships to Partnerships, Corporations, and Limited Liability Companies (LLCs), every business structure has its own advantages and limitations.
In this article, we are going to take a look at the tax benefits of an LLC and how forming an LLC can help your business grow. But before that, let’s take a closer look at what a Limited Liability Company is and why you should consider an LLC as your preferred entity type.
Why Should You Consider Forming an LLC in the First Place?
LLCs are one of the most common entity types due to the personal liability protection and flexible management structure they offer.
You should consider forming an LLC because:
- LLCs allow you to separate yourself from your company in the event of company debts, property damage, theft, lawsuits, etc. They provide you with legal protection.
- LLCs protect your personal assets such as your house, vehicle, property, and savings accounts in the event your LLC faces bankruptcy or debts.
- LLCs offer limited ownership restrictions. Owners of an LLC are called “members.” Your LLC can have one or more members. There is no limit on the maximum number of members an LLC can have.
Plus, anyone can be a member of an LLC, from individuals to corporations, other LLCs, and foreign entities. However, banks and insurance companies cannot become members of an LLC.
- LLCs offer a flexible management structure. You can either run a member-managed LLC (where everyone participates in decision making) or run a manager-managed LLC (where one or more appointed managers make important company decisions).
- LLCs require minimal compliance and less paperwork. They don’t need to hold annual meetings and keep extensive records as corporations do.
Moreover, there are many tax benefits of LLC, which we’ll discuss in the next section.
Though LLCs are easier to form, you should complete all of the paperwork carefully to make sure that your business stays legally compliant.
Instead of doing it yourself, you should trust professionals to help you form an LLC the right way. Some of the companies that can help you with LLC formation include:
GovDocFiling offers easy business formation packages for LLCs and all other entity types. To form an LLC with them, you just need to fill out a simple application and have them do all of the paperwork for you.
Along with expedited application processing for both state and federal filings, they also help you create five important legal documents. You will also get a comprehensive business startup guide with up to $ 3K of potential savings.
LegalZoom is one of the biggest players in this business. Once you’ve selected a name for your company, you can start by answering a few questions to form your LLC.
They provide you with a list of services you may need and allow you to select a business package that fits your needs and budget.
3. Swyft Filings
Swyft Filings is another document filing service that you can leverage to form an LLC to run your business. You need to tell them about your business by filling out an online form. Once you’ve entered all of the required information, they will file the essential documents on your behalf.
LLC Tax Benefits: Here’s What This Business Structure Offers
New business owners often find it challenging to determine which business structure to choose, which benefits to leverage, which tools to use, and how to get started.
Many small business owners choose an LLC as their business structure but don’t understand the tax benefits it offers. Let’s discuss what the tax benefits of LLCs are and how they can help you save on taxes and increase profits.
1. Pass-Through Taxation
An LLC is a business structure that not only protects your personal assets from business liabilities but also offers pass-through taxation. Your LLC will not have to pay any LLC taxes. Instead, the owners of the LLC will pay personal income taxes on the profits of your LLC.
The IRS considers an LLC as a disregarded entity, which means that you don’t need to file separate taxes for your LLC than for yourself as an individual. You can easily show company profits and losses on your personal income tax returns as a member of the LLC.
The income of an LLC is taxed at individual tax rates.
- If you form a single-member LLC as a solopreneur, your LLC will be taxed as a Sole Proprietor by default.
- If there are two or more members in your LLC, it will be taxed as a Partnership by default.
Unlike LLCs, Corporations are taxed twice – once at the corporate level and once at the individual level when the dividends of the company profits are passed on to shareholders.
2. Taxation Flexibility
Many entrepreneurs prefer to form an LLC due to the taxation flexibility this business structure offers.
As the owner of an LLC, you can choose your limited liability company to be taxed as a:
- Sole Proprietor
If you’re not sure which is the best taxation option for your LLC, you should consult with a competitive business consultant or accountant to get advice.
LLC taxation rates and requirements also vary from state to state. You should also check with the state to find out the tax liabilities and ongoing tax filing requirements of your LLC.
You can also use resource guides for new businesses to learn more about the basics of setting up and running a business.
3. Tax Deductions
Forming an LLC makes it easier for you to deduct business expenses from your taxable income when compared to other business structures.
You can easily take advantage of the tax-deductible business expenses of your LLC such as:
- Office rent
- Travel expenses
- Business insurance premiums
- Charitable contributions
- Leasing assets such as a home office
You can deduct many business expenses to reduce the taxable income of your LLC. This will help you save a lot of money on taxes. You can instead use that money to grow and scale up your business.
Are You Ready to Leverage the Tax Benefits of an LLC?
Forming an LLC can be a great choice for your business. You should create an effective financial plan to track business expenses, earnings, and profits, keep records, and calculate taxes.
Understanding the tax benefits of an LLC will help you make informed decisions and choose a taxation option that minimizes your taxable income. You can save money on taxes and use it to grow your business further.
Do you need help choosing a business structure for your company? Are you unsure about how to get your LLC taxed? Feel free to comment below.