The term LLC refers to limited liability companies which are operated by one or more owners who are usually referred to as ‘members’. In case the LLC has only one owner, it is taxed according to the rules of sole proprietorship. LLC taxes are not taxed as a separate business entity like a corporation; rather, it is taxed as a ‘pass-through’ entity like a partnership or a sole proprietorship. The reason for this is that the liabilities or the profits of the business are directly passed on to the owners of the company. Also, the LLC itself will not have to file any taxes. However, the LLC taxes usually turn out to be more expensive than an incorporated firm.
Sole Proprietorship, Partnerships and Corporations
For a sole proprietorship or a partnership, the owners end up paying a lot of money in taxes. However, by incorporating themselves as a corporation, they will be able to save a lot of money that would otherwise have to be spent as tax. There are many websites on the internet that can provide you with information on how to incorporate yourself. There may also be cheap incorporation options available as well. In some instances, it may be a better option to form a LLC rather than incorporation.
Benefits of LLC
LLC’s are beneficial because of the limited liability that they come with. LLC taxes are charged to the owners of the company based on the rules of sole proprietorship and partnership. Sole proprietorship rules apply when there is only one owner and partnership rules apply when the firm has two or more owners. Although LLCs with more than one member are usually in classified as partnerships for the purpose of LLC taxation, this is not mandatory. In fact, and LLC which has multiple members can choose to be treated either as an LLC or S Corp as well. However, if the LLC decides to be treated as an S Corporation it would then lose the benefits that would come with partnership tax treatment. If the LLC is treated as a partnership for the calculation of tax, it will be subject to a single federal tax at the partner level.
Concept of ‘Double Tax’
When an LLC is assessed for income tax, if it is treated as the sole proprietorship or a partnership, the limited liability company is not treated as a separate entity. All the members of the LLC are individually tax and are liable to pay tax on the share of the profit, losses, credits, and deductions as per the rules. Each member will be liable to pay tax based on the amount earned by the individual.
The advantage that is offered by this is system that the individual will not be taxed twice. This is the benefit of the ‘passing through’ of liability to the owner. With respect to a corporation, the corporation will be taxed separately as an entity and each of the members would be taxed based on the salary received from the corporation. LLC taxes are not taxed twice. However, double tax is a concept that is followed for every corporation.