#1. Flexible tax structures
LLCs can elect how they are taxed. This is probably one of the best – but least understood – advantages of forming an LLC. You can decide whether it's better to file your taxes as a "disregarded entity," as a partnership, or to get corporate tax treatment. If you are the only member of your LLC, then the default tax treatment is as a disregarded entity. When it comes to taxes, a disregarded entity is treated the same as a sole proprietor, meaning your LLC's income is treated like personal income. If your LLC has multiple members, then partnership taxation is the default tax treatment.
If you want to elect corporate tax treatment, you generally have the option of either being taxed as an S-corporation or C-corporation. To obtain corporate tax status with the IRS, you are required to file either IRS Form 2553 or IRS Form 8832. Both of these approaches can have big advantages, depending on how much income you personally want to take and how much you plan to reinvest in your business.
Because everyone's situation is unique, it’s best to consult with a tax professional or lawyer to drill down into your finances in order to really understand which option is best for you.
#2. Lower self-employment taxes
With a sole proprietorship, you are generally required to pay self-employment taxes on all of the net profit of your business. However, an LLC that is taxed as an S-corporation may allow you to pay less in self-employment taxes. With an LLC taxed as an S-corporation, you are able to classify a portion of your income as salary and a portion of your income as a distribution. While self-employment taxes are still calculated on the portion of your income that is from your salary, they are not calculated on the distributions that you receive from your LLC that is taxed as an S-corporation. It is important to know that not all LLCs are eligible to make an S-corporation election. A tax pro can assist you in determining if you are able to reduce your self-employment taxes by converting your business to an S-corporation structure.
#3. Avoid double taxation
With a C-corporation tax structure, the business pays income tax at the corporate level and the shareholders are taxed at the personal level on any dividends that they receive from the corporation. While this can be a desirable tax structure for some businesses, it is often more beneficial to avoid having taxes at both the corporate and personal level. With an LLC that is taxed as a disregarded entity, as an S-corporation, or as a partnership, you only have income tax at the personal level. Depending on the specifics of your situation, a structure that results in only one level of taxation may save you a considerable amount of income tax.
#4. Limited franchise taxes
Some states assess a franchise tax for corporations and LLCs that are registered in the state. The amount of franchise tax varies significantly from state to state and the method of calculating the franchise tax also varies significantly. In a number of states, LLCs may pay a lower amount of franchise tax compared to corporations. For example, LLCs in Delaware are subject to a fixed $300 franchise tax. However, corporations in Delaware have a variable franchise tax with a maximum of $250,000. The amount of franchise tax is only one factor that you might consider. A Rocket Lawyer network attorney can help you consider all the angles and assist you with determining which state makes the most sense for registering your business.
#5. Ability to lease assets
Operating an LLC may also allow you to lease your personal assets to your LLC. For example, if you use a home office to run your LLC, the LLC may be able to lease the office from you (the person). By doing so, you'd be able to create a business expense the LLC could write off, while adding more income to your family's bottom line. Keep in mind that these expenses are required to be legitimate business expenses. In this scenario, a formal Commercial Lease would be required.
No matter how you run your business, don't forget that business expenses can be deducted. Most importantly, you can deduct the cost of forming your LLC – so make it a practice to hang on to all your receipts.
Haven’t registered your LLC yet? Let the Rocket Lawyer business services team help you set up your LLC quickly and easily. If you have questions about starting or running your business, or registering your LLC, reach out to a Rocket Lawyer network attorney for affordable legal advice. If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Leave your taxes to a pro with Rocket Tax!
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
