Have an LLC? Do This and Save More on Taxes
If you’ve done any research about starting a business in the United States, you’ve heard about the Limited Liability Company (LLC). For years, forming an LLC was the creme-de la creme of business formation. It helped you separate your personal assets from business assets and created a legal barrier that protected your personal possessions. But there’s a way you can turbo charge your LLC. Choose to get taxed like a corporation.
LLC taxed as an S-Corp
One of the primary reasons for choosing to form an LLC is usually tax benefits. However, if you're not evaluating the way your business entity is taxed, you're probably not maximizing on this benefit. If you choose to be taxed as an S-Corporation, you have the opportunity to legally avoid paying Social Security, Medicare, and self-employment taxes. You also will not be taxed as a business entity, so you are able to maintain the pass-through taxation that made LLCs so favorable.
There are restrictions regarding who can have an S-corp or be taxed as one. The major restrictions are:
- You cannot have more than 100 shareholders
- All of the shareholders must be US citizens or residents
- You can only have one class of stock--that means no preferred stock with privileges that other stockholders don’t have, and
- The shareholders are real people--not other corporations or partnerships.
For an LLC owner who works for the LLC, he could save up to $9,000 on $100,000 annual business profit--legally. There are of course nuances that a tax professional can help you navigate to make sure that you are reaching your full savings potential, but this is one of the options.
LLC as a C-Corporation
If you elect to have your LLC taxed as a C-Corporation (or standard corporation), you are still able to benefit from paying self-employment taxes, but your business is required to withhold taxes on salaries distributed. The profits are not subject to any additional self-employment taxes. The profits are however still taxed at the entity level and at the ownership level. Thus, if an owners corporation, the corporation will be subject to paying taxes on its profit, and if it pays that profit to the owner, the owner will pay taxes on the amount he receives.
In most instances, an election to be paid as an S-Corp will provide more benefits to a small business. However, C-Corp elections maybe more appealing for individuals seeking venture capitalist investments. Additionally, the weight of some of these additional tax burdens maybe reduced with careful tax planning.
The choice to be taxed like a corporation can be made by an attorney preparing your formation documents or by a tax professional.
Temi Siyanbade, Attorney at Law. This blog does not provide legal advice and does not create a lawyer client relationship. For legal advice, contact a lawyer and discuss your specific situation with them.