By The Wyoming LLC Attorney TeamFeb 11, 2023
Starting an LLC in Pennsylvania? Understand the tax implications. LLCs often face pass-through taxation, with owners reporting profits on personal tax returns. Single-owner LLCs report income directly, while multi-owner LLCs divide it among members. Deductible expenses include start-up costs, home office expenses, travel, and more. Carefully consider your LLC's tax structure for maximum benefits.
Setting up a Pennsylvania Limited Liability Company is hard if you've never done it before, and we understand that you might be feeling overwhelmed by all of the components involved. If you're looking for the ways in which your LLC will be taxed, we will try our best to explain what taxes you will be required to pay in Pennsylvania.
A Limited Liability Company (which can be shortened to LLC) is a type of business entity that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protections afforded to corporations. Providing limited liability protection to owners, it's easy to set up and manage, but it does require some additional planning in order to be as effective as possible.
Tax is deducted from all companies, but the rate at which it is removed from an LLC is different. Unlike corporations, which are taxed as pass-through entities, meaning they pass their profits through to their owners, LLCs are taxed as flow-through entities: the company itself accounts for its income and losses on its tax return.
This means that, if you own an LLC and make money from it, your personal income tax bill will be lower than if you were just an employee at another company—even though both types of businesses have similar legal structures and operate under the same laws.
Most Pennsylvania LLCs are taxed as pass-through entities. That means they don’t pay taxes on their own income, but rather the owners pay tax on their share of profits. This is because they are not separate tax entities like corporations. Instead, it's what the Internal Revenue Service calls a “pass-through entity,” like a partnership or sole proprietorship.
In a corporation, the business itself pays taxes on its own profits and losses. In an LLC, however, each owner reports his or her share of the company's net income or loss in his or her personal income tax return. You can also choose the type of tax classification to apply to the business, which ranges from:
If you do not elect the LLC to be taxed as one of these entities, it will be taxed as a partnership. However, if your LLC is being run with multiple members and has shareholders who are not also members, there are other options available to you:
The Pennsylvanian Department of Revenue (DOR) administers the tax laws for the state, collecting and distributing taxes to the local government. Corporation Income Tax is based on net taxable income at a flat rate of 5.5% for all corporations doing business in Pennsylvania. Here are the two different types of income taxes for LLCs in Pennsylvania.
If you're a single-member LLC, your business is considered a sole proprietorship for tax purposes. This means the IRS does not require your small business to file an annual return with them, and it also means that you will personally be responsible for paying taxes on any profits made by your company.
You can opt to have your single-member LLC taxed as a corporation or partnership, however. A corporation has its own tax ID number and files its own separate tax returns every year with the IRS. You may choose this option if you would like to receive more than one type of income from your company, such as salary and dividends, or if there are other assets besides the business itself that need protection from creditors during bankruptcy proceedings.
Similarly, you should remember that the IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself doesn't pay taxes and doesn't have to file a return with the IRS. In contrast, corporations are taxed as separate entities, so they must file separate corporate returns.
If you choose to involve others in the ownership of your LLC, then this becomes a multi-owner LLC. Each owner has to pay taxes on their share of the profits on their personal income tax returns.
If you choose to have your LLC taxed as an entity that is treated as a partnership instead, all income and losses will flow through to the individual members. This means that all income, gains, losses, and deductions will be reported on each member's personal tax return.
An LLC can choose to elect taxation as either a C or S corporation. This should be decided on by a vote between the members of the corporation and must be documented in the LLC operating agreement.
The LLC can be taxed as a corporation or partnership. If the LLC has more than one member, the members can elect to be taxed as an S-corp or C-corp.
S-corps are small organizations that have a degree of liability and are ideal for those with small, family businesses. These will be taxed at a fair rate for your profits. If there is just one owner (member), then he/she can elect to be taxed as an S-corp with a single member.
Many businesses are choosing to form a limited liability company in Pennsylvania instead of a corporation. An LLC is not typically taxed as a corporation, but you can opt for this if you prefer. Here's how:
LLCs that choose to be taxed as corporations must file Form 8832 with the Internal Revenue Service (IRS). This form requests the IRS’s approval to convert your entity from pass-through taxation—where profits are passed through to shareholders without being taxed at the corporate level—to being taxed directly by the federal government. When an LLC converts its status from a partnership or S-corp status, it becomes subject to double taxation on certain income types and faces significant administrative burdens because it must now file Schedules K-1 for each shareholder, which they must then report on their own tax return forms.
If an LLC has $50 million or more in assets and employs over 100 people who work more than 1250 hours per year, they may need to pay corporate taxes in addition to payroll taxes, like FICA and state unemployment insurance programs.
One of the biggest benefits of forming an LLC is that you get to decide how you want your business to be taxed. You can elect to be taxed as a corporation, partnership, or S-corp. If you’re not sure which option is best for your situation, consider these factors:
If your business is new and doesn't expect to make significant revenue this year, then it might make sense to elect yourself as an S-corp so that you don't have to pay tax on profits until next year. You can always change it later on if needed.
If your business already has significant revenue this year because of big projects or one-time sales events, then it might make sense for you to elect yourself as a corporation so that you can distribute dividends back into the hands of your shareholders.
There are a number of expenses that are tax-deductible, including:
If you're an LLC owner, you can also deduct your pro rata share of the company's operating expenses. In other words, if the company has $1 million in annual business expenses and you own 50% of it, your share is $500k. When calculating your deduction for this amount, make sure that no one else is claiming it as well.
Similarly, if you own less than 100% of your company, you may also be able to deduct debt-related interest paid by the company as long as you meet certain requirements, such as having sufficient net taxable income before claiming such deductions (more on this later). These deductions include interest paid on loans used to fund operations or purchase equipment or building improvements. However, please note that not all businesses qualify for such deductions, so check with our office about whether yours does before making this claim. We also recommend enlisting the services of our trusted partner Bench. They can help you organize your books, maximize your deductions, and get your filing done efficiently this year.
If you have an LLC, there are a few other taxes you will need to pay. These include federal income tax, state income tax, payroll taxes, unemployment compensation, and property taxes on your business. There are also various other fees associated with owning an LLC.
The LLC structure is taxed as a partnership in Pennsylvania. This means that the LLC itself does not pay income taxes, but rather its members pay income tax on their share of the profits.
In addition, an annual franchise tax must be paid by entities operating in Pennsylvania. The amount of this tax varies based on the entity type and state revenue needs at any given time.
Self-employment taxes are usually a combination of Social Security and Medicare taxes, but what exactly you pay depends on whether you're a 'general' or 'limited' partner’. General partners have to pay self-employment taxes on all their business income from the partnership, whereas limited partners will be subject to self-employment taxes only on any guaranteed payments for services they provide to the partnership.
If you own an LLC, your company is treated as a sole proprietorship for tax purposes. You will file Form 1065 with the IRS and pay taxes based on that form, but not with the state of Pennsylvania. The good news is that this means that if you have ever owned a corporation or another type of business entity before, things are going to be very similar for your LLC in terms of how it is taxed by the IRS and what you need to do during tax season each year.
An LLC is a great choice for most businesses in Pennsylvania. However, it's important to determine if there are any special circumstances that would make another entity type more appropriate.
Ready to start your Pennsylvania LLC? Forming an LLC in Pennsylvania involves navigating various tax considerations. Understanding the taxation options and implications is vital. Examine the structures and consult professionals to make informed decisions. For assistance with your LLC, contact us through our contact form or call +1 (307) 683-0983. Our experienced paralegals are ready to guide you through the process.