Income Taxes: The IRS treats your Limited Liability Corporations like a sole proprietorship or a partnership, depending on the number of members in your Limited Liability Corporations. If you've already done business as a sole proprietorship or partnership, you are aware, because you know many of the basic rules.
Individual Owner Limited Liability Corporations: The IRS treats one member Limited Liability Corporations as Sole Proprietorship for tax purposes. This means that the Limited Liability Corporations itself does not pay taxes and does not have to file a return with the IRS. As the sole owner of your Limited Liability Corporations, you must report all profits or losses of the Limited Liability Corporations on Schedule C, and submit it with your 1040 tax return. If you leave money in the company's bank account at the end of the year, to cover future expenses or expand the business you must pay taxes on that money.
Multi-Owner Limited Liability Corporations The IRS treats co owned Limited Liability Corporations as Partnerships for tax purposes. Co owned Limited Liability Corporations themselves do not pay taxes on business income; instead, the Limited Liability Corporation owners each pay taxes on their lawful share of the profits on their personal income tax returns, with Schedule E. Each Limited Liability Corporations member's share of profits and losses, which is called a distributive share, is set out in the companies' operating agreement. Most operating agreements provide that a member's distributive share is in proportion to his percentage interest in the business. For example, if Donna owns 60% of the Limited Liability Corporations, and Tony owns the remaining 40%, Donna will be entitled to 60% of the Limited Liability Corporation's profits and losses, and Tony will be entitled to 40%. If you'd like to split up profits and losses in a way that is not proportionate to the members' percentage interests in the business, this is called a "Special-Allocation," and you must follow IRS rules. However the distributive shares are divided up, the IRS treats each Limited Liability Corporation member as though she receives her entire distributive share each year. This means that each Limited Liability Corporations member must pay taxes on their distributive share whether or not the Limited Liability Corporation actually distributes the money to her. The practical significance of this IRS rule is that even if Limited Liability Corporation members need to leave profits in the Limited Liability Corporations -- for example, to buy products or expand the business each Limited Liability Corporation member is liable for income tax on their share of that money.Even though a co-owned Limited Liability Corporation itself does not pay income taxes, it must file Form 1065 with the IRS. This form, the same one that a partnership files, is an informational return that the IRS reviews to make sure the Limited Liability Corporation members are reporting their income correctly. The Limited Liability Corporation must also provide each Limited Liability Corporation member with a "Schedule K-1," which breaks down each member's share of the Limited Liability Corporation's profits and losses. In turn, each Limited Liability Corporation member reports this profit and loss information on his individual Form 1040, with Schedule E.
Limited Liability Corporation can decide on Corporate Taxation Methods If your Limited Liability Corporation will regularly need to retain a amount of profits in the company, you can save money by electing to have your Limited Liability Corporation taxed as a Corporation. Paying Income Taxes Because Limited Liability Corporation members are not considered employees of the Limited Liability Corporation, but rather Self Employment business owners, they are not subject to withholding taxes. Instead, each Limited Liability Corporation member is responsible for setting aside enough money to pay taxes on his share of the profits. You must estimate the amount of tax you will owe for the year and make payments to the IRS each quarter -- in April, June, September and January. Limited Liability Structures
Limited Liability Company(LLC)The Limited Liability Corporation is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the Limited Liability Corporation is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. Limited Liability Corporation's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.
Professional Limited Liability CompanyAdvantages
Limited Liability PartnershipAdvantages
State Taxes and Fees Most states tax Limited Liability Corporation profits the same way the IRS does: The Limited Liability Corporation owners pay taxes to the state on their personal returns; the Limited Liability Corporation itself does not pay a state tax. A few states, however, do charge the Limited Liability Corporation a tax based on the amount of income the Limited Liability Corporation makes, in addition to the income tax its owners pay. For instance, California levies a tax on Limited Liability Corporations that make over $250,000 per year; the tax ranges from about $1,000 to $9,000. Some states, such as California, Delaware, Illinois, Massachusetts, New Hampshire, Pennsylvania and Wyoming impose an annual fee on Limited Liability Corporations, alternately called a " franchise tax," an "annual registration fee" or a "renewal fee." In most states, the fee is about $100, but California exacts a hefty $800 fee per year from Limited Liability Corporations, and Illinois, Massachusetts and Pennsylvania charge $300, $500 and $330, respectively. Before forming an Limited Liability Corporation, find out if your state charges a separate Limited Liability Corporation-level tax by visiting the website of your state's Revenue or Tax Department.
Corporate Taxation and Your Limited Liability Corporation Tax Bill If you regularly need to keep a substantial amount of profits in your Limited Liability Corporation, retained earnings, you might benefit from electing corporate taxation. Any Limited Liability Corporation can be treated like a corporation for tax purposes by filing IRS Form 8832 and checking the corporate tax treatment box on the form.
After making this election, profits kept in the Limited Liability Corporation are taxed at the separate income tax rates that apply to corporations; the owners do not pay personal income taxes on profits left in the company. Unlike an Limited Liability Corporation, a corporation pays its own taxes on all corporate profits left in the business. Because the corporate income tax rates for the first $75,000 of corporate taxable income are lower than the individual income tax rates that apply to most Limited Liability Corporation owners, this can save you and your co-owners money in overall taxes.
Once you elect corporate taxation, you can't switch back to pass-through taxation for five years, and if you do switch back, there could be negative tax consequences. In other words, you should treat the decision to elect corporate taxation as seriously as you would the decision to convert your Limited Liability Corporation to a corporation.
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