LLC Vs. Sole Proprietorship Tax
Comparing the taxation of a sole proprietorship and a limited liability company can be confusing, especially for new business owners. Sole proprietors are subject to relatively simple tax requirements. However, LLCs are not subject to LLC-specific tax requirements. Instead, the owners of an LLC elect to be taxed as a sole proprietor, partnership or a corporation. An LLC that elects to be taxed as a sole proprietor is subject to the same tax requirements that an actual sole proprietor is. LLCs that elect to be taxed as a partnership or corporation are not.
Other People Are Reading
-
Sole Proprietor
-
A sole proprietor entity is simply an individual who works for himself. A sole proprietorship is a pass-through entity. This means that any income or losses of the business are considered the income or losses of the individual owner. A sole proprietor only can have one owner, and that owner is never considered an employee of the business. The owner of a sole proprietor reports income from the sole proprietor on his income tax form (Form 1040). Income from a sole proprietorship is always classified as self-employment income and is subject to the federal self-employment tax, Schedule SE Form 1040.
LLC Classified as a Sole Proprietor
-
An LLC with a single owner (member) may elect to be taxed as a sole proprietorship. This option is only available to LLCs with a single owner, and some states may enforce other restrictions on this type of entity. A single-member LLC is considered a sole proprietor for tax purposes by default. The owner of this type of entity is subject to the same income tax requirements of an actual sole proprietor entity.
-
LLC Classified as a Partnership
-
An LLC classified as a partnership must have at least two owners. For a multi-member LLC, this election offers benefits similar to those of the pass-through entities (single-member LLCs and sole proprietors). An LLC taxes as a partnerships are subject to all the same federal and state taxes levied on partnerships. The entity must file Form 1065 with the federal government and furnish each owner (partner) with a copy of the completed form. The partners report their share of the income or losses just as the owner of a sole proprietorship would.
LLC Classified as a Corporation
-
An LLC may elect to be taxed as a corporation regardless of the number of owners. This type of LLC is taxed just like a corporation. This means the entity itself is taxed on its income before the owners even receive their shares. Each owner (shareholder) also must pay personal income tax (Form 1040) on the income generated from their ownership in the corporation. This, in effect, means the LLC's income is taxed twice by the federal government.
Non-Income Taxes
-
Sole proprietors have a distinct tax advantage over LLCs when it comes to non-income taxes. Sole proprietors don't need to be formed or registered with a state government like LLCs, corporations and partnerships do. The process of forming and maintaining a non-sole proprietor entity can cost hundreds or thousands of dollars in additional taxes. Every state levies a fee on new business entities created in the state, and many levy annual franchise taxes on these entities. Only sole proprietors (not LLCs taxed as sole proprietors) avoid the franchise tax and fees.
-
References
- Photo Credit this with the company image by Yuriy Rozanov from Fotolia.com
