| Before considering any type of business entity, you'll | | | | An owner may elect to S corporation tax status. |
| want to consider the pros and cons of each structure | | | | Many LLC owners opt to elect S Corporation tax |
| and what will work best for your business. One of the | | | | status because they can pay themselves a |
| first questions that new business owners ask is this | | | | reasonable salary, tax that amount, and collect |
| one: "How will my business be taxed?" For small | | | | distributions from the company as surplus income. This |
| business owners who choose to form an LLC | | | | often results in a substantial savings to the owners. |
| structure, there are several options to consider. | | | | First, the key is to file the federal 2553 certified to the |
| Knowing the facts before considering the tax structure | | | | IRS. |
| for your Limited Liability Company will keep you out of | | | | The EIN application is not enough to tell the IRS your |
| hot water. There are several options to consider. You | | | | entity is taxed as an S election. Plus you may have a |
| may be taxed as a partnership or sole proprietorship, | | | | home state form to file, make sure you check! For |
| taxed as an S corporation, or taxed as a C | | | | instance, an LLC owner that earns $60,000 and is |
| corporation: | | | | taxed as a sole proprietorship will pay $9,180 in |
| An LLC is usually taxed as a sole proprietorship or | | | | self-employment taxes ($60,000 X 15.3%=$9,180). If |
| partnership. Under normal circumstances, the LLC is | | | | you elect an S Corporation tax status, you may |
| taxed as a partnership or sole proprietorship. In 1997, | | | | choose to pay yourself a salary of $40,000 (a |
| the IRS established federal default rules. The default | | | | reasonable salary is required). That salary will be taxed |
| rules say, if you have one owner, the LLC will be | | | | at the same 15.3% rate, but you'll save $3060 in taxes. |
| taxed as a disregarded entity, meaning all the profits | | | | You can then pay the remaining $20,000 as a |
| and losses will show up on your personal tax return (if | | | | distribution from the company. |
| you are the owner). In this case there is no federal or | | | | What happens when an LLC elects corporation (C |
| state single member LLC that is disregarded for tax | | | | corporation) tax status? If you decide to structure your |
| purposes. | | | | LLC as a corporation, you will need to file form 8832 |
| If the LLC has two members, the default is to be | | | | to the IRS. Plus you will need to amend or update the |
| taxed as a partnership. That means a 1065 is filed on | | | | operating agreement to note the language about the C |
| April 15th federally each year. If you business is earning | | | | corporation election. |
| earned income all the profits are subject to self | | | | You will pay federal income taxes on the profits if the |
| employment taxes in 2009 which is up to $106,800. If it | | | | LLC is taxed as a C corporation. At first, this may not |
| is taxed as a partnership and one partner is not active | | | | seem like good business sense, but if you plan to |
| (they work very few hours or are just passive) their | | | | expand the business one day and would like to leave |
| distributions may not be subject to self employment | | | | the profits in the business, you could save on taxes in |
| taxes. Be sure to check with your CPA for exact | | | | the long run. To benefit from this structure, the LLC |
| input. For the one-owner LLC, you'll file a 1040 tax | | | | should be generating profits since the first $75,000 is |
| return and attach a Schedule C. | | | | taxed at a lower rate than a sole proprietorship or |
| As a Limited Liability Company taxes as a partnership, | | | | partnership. |
| you'll pay no federal income taxes when taxed in this | | | | Tax laws can be confusing. When you form an LLC, |
| manner. The LLC is often called a "pass through" | | | | consult a tax professional to help you decided which |
| entity. This means that each member (owner) of the | | | | tax structure will work best for you. Since tax laws |
| LLC reports his or her share of the profits and losses | | | | change from year to year, don't leave your decision up |
| on their individual tax returns, regardless of the number | | | | to chance. What you don't know may significantly hurt |
| of members. LLCs with multiple members will report | | | | your bottom line. |
| their individual profits and losses on Schedule C as well. | | | | |