As one of the most popular forms of a business, a Limited Liability Company (LLC) requires less paperwork than a corporation. An LLC also limits your personal liability for any legal actions taken against the business. Perhaps the greatest benefit of forming an LLC boils down to dollars and cents – the tax benefits.
The Primary Tax Benefit of an LLC
An LLC enjoys a tax benefit called a pass-through, which allows the owner or owners of an LLC to receive earnings without having to pay corporate federal income taxes. The pass-through benefit differs from what a standard C-corporation has to pay in taxes. C-corporations must pay a corporate federal income tax, and any distributions made to the owners get taxed using the individual income tax rate. Avoiding double taxation can save a member of an LLC a substantial amount of money.
Larger Contribution Limits
Members of an LLC can create retirement funds and life insurance policies that have higher contribution limits than the contribution limits established for other types of businesses. This means you can set aside more money to provide for your family, as well as build a much more lucrative retirement nest egg. Both investments remain tax-free until a designated period expires, which means you generate more tax-free income upon retirement or when you need to cash in on your life insurance policy
Leasing Personal Assets
As a member of an LLC, you have the legal right to lease personal assets to the company. Let’s say you work out of a home office to run your LLC. You can lease the home office to the LLC, which creates a business expense that you write off when the time comes to file taxes. For an asset such as a home office, you must develop a formal lease agreement. Moreover, leasing personal assets must cover legitimate business expenses. For example, you cannot lease your boat to your LLC (unless the boat was a legitimate expense), and then write off the expenses associated with the lease.
Another important tax benefit of an LLC is that the Internal Revenue Service (IRS) provides business owners with flexibility in how they want their businesses taxed. If you run an LLC, you can choose to be taxed like a partnership, sole proprietorship, C-corporation, or S-corporation. Filing IRS Form 8832 lets the agency know how you want your LLC to be taxed.
The tax flexibility that you enjoy when forming an LLC does have some limitations. For instance, an LLC with multiple members cannot choose to be taxed like a sole proprietorship. The IRS taxes an LLC with several partners like a partnership. Take time to learn more about how the IRS taxes LLCs by accessing Form 3402.
Forming an LLC is not all about tax benefits. Unlike the wages received from an employer, you cannot withhold money from paychecks to cover taxes. This is more of a logistical issue that a registered agent can handle to ensure you comply with every tax regulation. You also have to remember that members of an LLC cannot evade taxes; they simply pay federal income taxes based on individual tax rates.
Nonetheless, the tax benefits associated with forming an LLC make this type of business entity popular among entrepreneurs who want to limit the tax liability of their businesses. LLCs are the most tax-friendly form of business entity, especially LLCs formed in Wyoming. Cloud Peak Law Group can help. Contact us today!