Tax Benefits of a Limited Liability Company
Converting your business from a sole proprietorship or partnership to a limited liability company (LLC) can be a smart strategic move for a number of reasons. Your LLC will be treated as a separate legal entity, which can protect your personal assets. Forming an LLC also gives you the ability to determine how you want profits distributed and how you want your company to be taxed. An LLC offers many desirable tax benefits.
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Tax Election
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One of the benefits of converting your business to an LLC is being able to elect how you want your company to be taxed. If you are an LLC with one owner, you'll be taxed as a sole proprietor. If you are an LLC with more than one member, you can elect to be taxed as a partnership or a corporation. If you elect to be taxed as a corporation, you can choose whether to be taxed as an S corporation or a C corporation. The latter structure is best suited to larger companies that plan to reinvest most of the profits back into the business. If you plan to have fewer members and you want to take profits from the business, electing to be taxed as an S corporation may be your best option.
Pass-Through Tax
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If you are an LLC that elects to be taxed as a sole proprietorship, you will be able to "pass through" your profits and losses to your individual tax return. You'll report your business earnings on Schedule C of your Form 1040 tax return. If you are taxed as a partnership, you will be able to pass through your profits and losses to your 1040 tax return based on your pro rated share of the partnership. If your LLC is taxed as a partnership, you will report your profits and losses on Form 1065 and Schedule K-1.
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Benefits
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If you elect to have your LLC taxed as an S corporation, you may be able to claim losses that exceed your investment in the company. When you form an LLC, you will also avoid the dreaded "double taxation" that C corporations face. Profits from an LLC are taxed only once when you elect to be taxed as a partnership or an S corporation.
Proportionality
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When you form an LLC, you can distribute profits using a formula that isn't necessarily equal to the investment made. In other words, if you own a 10 percent interest in your LLC, you can be paid more than a 10 percent share of the profits. Furthermore, your ownership percentage can differ from your investment amount. For instance, you can invest 15 percent of the capital in your LLC but your ownership may be 30 percent.
Other Considerations
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Another great tax benefit of an LLC is that you can carry on your business without worrying about exposure to personal liability. Personal assets, such as your home and retirement accounts, are protected in the event that your LLC is drawn into a lawsuit. In addition, you can be a nonresident alien and be the owner of an LLC.
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References
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