If you consider the tax consequences of an LLC compared to those faced by a corporation, you will see there are significant and favorable distinctions. The opportunity to create a limited liability company with multiple members or establishing an LLC as a single-member entity is available to entrepreneurs in every state of the U.S. and the District of Columbia.

Deciding on a corporate structure is not made lightly by business owners. A lot of times, many owners end up choosing in favor of forming an LLC because it has a more straightforward process. To start a limited liability company, an owner must file all the appropriate documents with the proper state agency and pay the filing costs. 

According to numerous small business owners, tax filings for an LLC are not too complicated and returns are less involved than those of its corporate counterpart. Management is another area considered by owners. An LLC notably differs from corporations because its business structure comes with more flexibility.  

A Few Major Differences and Advantages of Creating an LLC  

When members start a limited liability company, right away state regulations give the business a few fundamental traits similar to a corporation. One such way is when it comes to LLCs protecting its members' personal property as assets separate from the organization, along with any claims that someone might bring against the company for debts. 

Lenders, such as banks and others cannot come after the owners individually under LLC laws. An exception to the rights of this particular protection would be in the event you signed a formal statement promising to finance the business personally.

LLCs and corporations have many differences, but the tax consequences of an LLC are of the most vital. A limited liability company is a "pass-through" tax entity. This classification means that instead of the company itself paying taxes, the business income passes down to each member.

The owners report the profits and losses on their income tax return. For the IRS, this means a  single-member LLC would file Form 1040 and a partnership would use Form 1065. With members doing personal income returns that are separated from the company itself, the chance of double taxation gets eliminated, though it can occur with corporations.

Under the corporate structure, both the shareholders and the corporation pay taxes on the profits. The fact that there are no shareholders involved is one reason LLCs have a different tax structure.

For purposes of taxation, an LLC can elect recognition as a corporation. If that's the case, the LLC would file Form 8832 with the IRS. One of the primary benefits for an owner to opt for this particular tax identity is to receive lower tax rates without a complete change to a corporation in all other ways.

Limited Personal Liability Also Means Limited Business Loss Deductions

Since members throttle their amount of personal liability in the company, the owners may not be able to include all the losses experienced in a given year. Each state varies, but many of them apply extra fees and taxes to LLCs. However, it is common for an annual fee imposed by the state to get applied as a flat rate.

It is essential to the understanding and awareness of a company's current tax treatment that business owners stay on top of any changes or developments in taxation at both the federal and state levels. Many owners incorporate or form an LLC to keep a tight hold on their personal assets by creating a separate business entity to protect their belongings.

The Internal Revenue Service does not have specific returns for LLCs. Therefore, it is up to you and other members to decide which tax entity will work best. The IRS will recognize your company as either of these:

Each situation presents its own set of benefits. There may also be specific state forms to file depending on the tax entity you pick.

The internet has an abundance of information regarding federal taxation for LLCs. However, not all of it is correct. Landing on the wrong webpage that has missing or inaccurate information could lead to expensive mistakes and put your LLC in trouble with the IRS. Consider consulting with a tax professional and business lawyer before deciding on your tax structure.

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