Making your business dreams come true can be an incredible experience - but coming up against tax issues can slow down your progress. As you may know, regulations for an LLC can vary from state to state, including the ways in which your LLC may be taxed. This can feel like a headache without the right information and support!
If you are registering an LLC in North Carolina, whether this is your first LLC or you are expanding from another state, it is prudent to know what to expect. Here, we explore what an LLC is and how your LLC may be taxed in North Carolina, as well as what can be viewed as tax deductible. For a deeper understanding of North Carolina LLC tax filing requirements, and to see how Wyoming LLC Attorney can help, keep reading.
So, what is an LLC and why is it a good choice for your business? A limited liability company (LLC) is defined in the same manner across the United States, though the regulations may change on a state-by-state basis. Also known internationally as a private limited company, an LLC is a business entity in the same vein as a corporation or partnership. However, an LLC is different in that it does not make the owners responsible for the debts and liabilities of the company. What this means is that if your company makes a financial loss or fails altogether, you are not personally accountable for the finances and repayments. This can reduce the risk for owners (or members, as they are officially known). You don’t need to worry about your personal finances being directly impacted - which can really take a weight off your mind. It might make it easier to begin turning your business ideas into the real deal.
An LLC can have a single member or multiple members, and these can include individuals, corporations, or even foreign business entities. This can vary based on your state. You should also be aware that not all businesses can register as an LLC - such as those handling insurance or banking.
Another important distinction to make between a corporation and a limited liability company is that a North Carolina LLC has unique tax characteristics which can make it more favorable for members.
The location of your LLC is incredibly important for those smaller details. A limited liability company is taxed in very specific ways in North Carolina. For example, an LLC is not considered to be a completely separate entity when it comes to tax - unlike a corporation.
Instead of being considered separate tax entities, LLCs are considered “pass-through tax entities”. This means that, while the owner of the LLC is not personally liable for debts and financial failings, the members are responsible for paying federal income taxes. A North Carolina LLC does not need to pay its own separate income tax - this is the sole responsibility of the members. While it is true that in some states LLCs are subjected to separate taxes and fees for operating within the state boundaries, this is not the case in North Carolina. This is much more similar to a partnership or sole proprietorship.
How your LLC income is taxed in North Carolina can also depend on the number of members in your LLC. How you structure your LLC will have a large impact on your business tax in North Carolina.
A single-owner LLC is treated as a sole proprietorship for tax reasons. The IRS sees single-member LLCs as disregarded entities, which means that the business is seen as separate from its owner for liability purposes, but is viewed as the same for taxation. If your LLC falls under this umbrella, you will not be legally liable but will be liable for taxation. Any taxes that your LLC incurs are added to your own personal taxes, and your LLC will be taxed in the same way that you are personally. You will report the tax activities of your business on your own tax return rather than filing separately.
A multi-owner LLC is viewed as a partnership by the IRS. This is not entirely dissimilar to single-member LLC taxation. Your LLC will not be taxed itself, rather all the co-owners/members of the LLC each pay taxes on their own share of the LLC’s overall profits. You do not pay tax on business income. Again, any taxes, including profits and losses, relating to the LLC will be filed on the individual income tax returns of each member, not separately.
When it comes to federal income taxation, a North Carolina limited liability company can have the option to pay taxes in a number of different ways, as well as simply paying as an LLC. This might feel difficult to grasp, but your choice depends on the structure and goals of your LLC. These tax options can include:
Members of an LLC are not considered to be employees of a company for tax purposes. Rather, you are considered to be self-employed. This means that you are responsible for your own benefits and tax return. Single-member LLCs often file in this way in order to reduce the difficulty of filing many different returns. Filing as a single entity for tax purposes is usually seen as the default option for limited liability companies.
By choosing to be taxed as an S-Corporation, an LLC can save money on social security and Medicare costs, and avoid being double taxed. It can also save on self-employment taxes. This means that your LLC will still be considered a pass-through taxation entity, but will also fall under corporate tax regulations.
By choosing to be taxed as a C-Corporation, an LLC can be taxed as a corporation would. That is, the LLC will be considered a separate entity for business tax purposes. This reduces individual member liability but can mean that you will be subject to double taxation. It is also not always possible to choose to pay tax as a C-Corporation.
Choosing to be taxed as a corporation or separate entity can be beneficial for some LLCs - aside from potentially giving your LLC extra legitimacy among competitors. You must file a separate tax return, which can help to keep your own personal taxes and finances distinct from those of your professional dealings. This can be highly beneficial if you have many members in your LLC. However, there are also some potential additional taxes that will be incurred when you choose corporate taxation. In North Carolina, you will need to pay a flat rate of 5% in corporate tax (calculated from your taxable income). Your LLC may also need to pay the North Carolina corporation franchise tax - though this can depend on your business.
Overall, the best taxation option for you may be dependent on the number of members in your LLC and whether filing as a separate entity will provide more financial clarity. For single-member limited liability companies, it is usually easier to avoid corporate taxation.
As an LLC in North Carolina, there are certain expenses that are tax deductible. These are expenses you might pay out which you can then offset in your tax return - so keep those receipts and records! There are restrictions on the amount that can be deducted from some expenses, such as those relating to startup costs. These can include:
As well as income taxation, there are other taxes that you should be aware of when registering your LLC in North Carolina or any other state. While these taxes are relevant to North Carolina, if you operate your LLC across state lines you are likely to incur different fees and taxes. With this in mind, the general LLC taxes you can expect include:
If you do not choose to maintain your LLC’s status as a pass-through tax entity, you will need to pay the state taxes, such as 5% of taxable income and franchise tax. This amount and requirement can vary from state to state. You may be double-taxed if your LLC is registered and operating in multiple states.
As a member of an LLC, you will need to pay self-employment taxes. This will apply to all your earnings.
If your LLC has employees, you will be required to pay employer taxes in North Carolina. You will need to register for your employer identification as part of the process of starting your LLC. This might not be possible for you right away, but if you plan to grow your LLC, it’s worth thinking about now!
When you start an LLC that sells goods in North Carolina, you will also need to pay tax on this. Sales tax returns will be submitted to the Department of Revenue. You will need to register and pay state sales taxes on items such as cars and other vehicles, digital goods such as media downloads (music, visual media), electrical appliances, and furniture items. Most physical goods will result in it being necessary to pay sales tax. Sales tax does not apply to all goods - groceries, prescription medication, and gas are exempt from this. However, it does apply to some services where goods may not be sold.
When it comes time to file and pay your LLC-related taxes, including state income tax and other forms of tax, the process is relatively straightforward. Depending on your elected taxation status, you will need to file different reports and forms.
In North Carolina, you are required to file your annual LLC report. This annual report can be completed as a physical copy or online via the Secretary of State site. You do not need to report a huge amount of information in your annual report, which is due annually by April 15th. This must be filed each year from the second year after your formation. For your annual report, you will be required to detail what kind of business your LLC does, the name and details of your registered agent, and the registered address of your limited liability company. You will also need to enter details on your members. This report costs $200 to file.
For your state income tax, how you pay this will depend on whether you pay as a pass-through taxation entity or as a corporate entity. For the former, your LLC details will be added to your own personal tax return. If you elect a corporate tax return, you will need to file IRS Form 2553 for your LLC. You will also need to use the State of North Carolina’s corporation income tax form, Form CD-405.
If you have employees and have an employee identification number, you will need to pay taxes on a federal and state level. In North Carolina, you will need to pay employee income taxes to the Department of Revenue, registering for this using Form NC-BR. From this point, you will file these withholding taxes with Form NC-5, and Form NC-3. It is also worth noting that you may need to register for unemployment insurance in North Carolina and file these taxes using Form NCUI 604.
If you are selling goods or services that incur sales tax in North Carolina, you should register this via Form NC-BR with the Department of Revenue and file your sales tax returns on a regular basis. This should usually be done every month or once per quarter.
For those forming a limited liability company in North Carolina or branching out operations into a new state, the tax implications can present some challenges. If you have questions about the best way to pay taxes for your LLC, then get in touch with our partners at Bench. Bench emerges as a valuable ally for small business owners seeking efficient financial management. By offering comprehensive services that not only save time but also minimize tax liabilities, Bench's expertise in bookkeeping and income tax preparation alleviates the burden on entrepreneurs.
Our expert team at Wyoming LLC Attorney is here to help you realize your dreams and achieve your business goals, regardless of your experience or financial status. We have extensive experience advising various limited liability companies in different states on how to address state taxes and the optimal filing strategies. Let us know how we can support you with your North Carolina LLC and propel your business forward. Reach us at +1 (307) 683-0983 or through our contact form. A member of our team of experienced paralegals is available to assist you in navigating the process.