Tax considerations for LLCs
Only Taxed Once
Members of an LLC are only taxed one time for their income if they have not chosen to be taxed as a corporation.This differs from a corporation in that a corporation's income is taxed and then the shareholders are all taxed for the profits they earn from the company.An obvious benefit to only having their profits taxed once is that the company itself is never taxed at what could be a higher rate; instead each individual member is taxed at their own individual rate.
Deduct Operating Losses
Active members of an LLC are allowed to deduct the operating losses of the company from their regular income.Granted, there are restrictions set up to monitor this, but members are able to deduct up to the extent of the law.Because members are taxed separately at their individual tax rate, this deduction could save them from paying a lot of taxes.Besides saving the individual money on taxes, this deduction could stand to save the LLC partnership money as well.
When self-employment taxes are high, members of an LLC could end up paying more taxes than an owner of a corporation.Deducting the operating losses could help alleviate these high taxes, but deductions alone may not be enough to cover a high interest rate.Business people considering between an LLC and a corporation should research interest rates and try to predict how interest rates will fluctuate in the future.
Another tax consideration that LLCs must consider is that all fringe benefits must be treated as taxable income.Fringe benefits include parking, group insurance, medical insurance, etc.This could cause the taxable income of a member of an LLC to skyrocket.If the member does not have a good income tax rate, then paying on all fringe benefits could be very difficult depending on how much each member earned during a given year.
Federal and State Payroll Taxes
LLCs are not only required to pay taxes on all fringe benefits, they must also pay federal and in sometimes state payroll taxes.On top of that, they are also responsible for paying unemployment insurance.However, each individual member of an LLC is not responsible for the taxes on their own unemployment insurance.
LLCs have many obvious tax benefits when it comes to tax considerations.They also have a few tax drawbacks.Besides being taxed only one time and being allowed to deduct operating losses, members of an LLC may be stuck with a high interest rate.That high rate could force an LLC to pay more taxes than corporation owners because LLC members must count all fringe benefits as part of their taxable income.
When deciding between a limited liability company and a corporation, business people should take into account all of the tax considerations given to an LLC.Those considerations may be a benefit for some LLCs or a drawback.The other benefits and drawbacks outside of taxes should also be considered.In some cases, those benefits may outweigh a high personal income tax rate.