LLC stands for limited liability company and is a business entity that offers protection of personal assets for the owner of a business. LLCs have the option to be taxed as a variety of business entities, giving a huge amount of freedom to the members (owners) of the business.
Forming an LLC also allows for a lot of flexibility in terms of the number of owners it allows. Despite this, the ability to limit personal liability if the business is sued or files for bankruptcy is probably the most appealing aspect of all. If you are considering forming an LLC, you have many options when it comes to taxation, ownership, and management.
One major benefit of forming a Limited Liability Company (LLC) is that an LLC is not a separate tax entity like a corporation. Instead, LLCs are considered a pass-through entity, by the IRS. Similar to a partnership or sole proprietorship, an LLC passes its profits on to its owners. The owners are then required to pay taxes on their personal income, on their individual tax return.
Since the IRS treats one-member LLCs as sole proprietorships for tax purposes, it means that the LLC does not pay taxes. Rather, the members are required to file their own tax returns. This means that the LLC does not pay taxes and does not have to file a return with the IRS. This responsibility falls on the members (owners)
Similarly, the IRS treats co-owned LLCs as partnerships for tax purposes. Co-owned LLCs also do not pay taxes on business income. Instead, the members of the LLC pay taxes on their own share of the profits. This is done on their personal income tax returns with Schedule E attached.
Another benefit of forming a business as an LLC is the ability to elect taxation. An LLC can choose to be taxed as a partnership or sole proprietorship. This is considered “pass-through taxation”, meaning the profits are directly passed on to the members.
Some LLCs choose to be taxed as a C corporation or S corporation. This election is typically chosen because it ends up resulting in lower taxes for high-income individuals. Although tax election does not change how your LLC operates, it does change how you pay taxes.
Tax deductions are an essential benefit of forming an LLC. You will not be required to pay taxes on most of the money that is spent on the operation by the business.
These deductions mean that you can “write off” your legitimate business expenses from your business income. This will result in lower net profits that are reported to the IRS. These expenses might include:
There are also new income tax deductions for pass-through entities. These were established by the Tax Cuts and Jobs Act in 2018. This act states that the owner of a pass-through entity can deduct up to 20% of the net income from an LLC for income tax purposes.
Along with federal taxes, each state has the option to charge state taxes as well. Florida is known as a tax-friendly state that does not have an income tax for individuals. Corporations that do business in Florida are subject to a 5.5% income tax, but LLCs, sole proprietorships, and S corporations are exempt from this. There is also a Florida annual report fee of $138.75 for LLCs.
Most often as an LLC owner, you will obtain income from business operations. This income is considered self-employment income. This means that you must pay a self-employment tax of 15.3%. This tax is divided into two parts. The first 12.4% goes to Social Security, while the remaining 2.9% is for Medicare or hospital insurance.
Overall, Florida taxes LLCs profits the same way the IRS does. The owner will be required to pay taxes to Florida on their personal tax returns. The LLC will never pay a state tax on its own, everything is done through the members (owners). To ensure you understand all of the tax implications for your LLC we recommend collaborating with our partners at Bench. Bench can help you organize your books, maximize your deductions, and get your filing done efficiently this year.