Tax Differences Between an LLC & a Sole Proprietorship
When establishing a business, taxes play a major role in determining which type of entity is created. In the case of sole proprietorships and limited liability companies (LLCs), there are a number of notable differences between the two.
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Sole Proprietorship Features
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A sole proprietorship is when an individual owns a business in which the assets and liabilities of the business are a part of the owner's personal net worth. All of the income that is received from the business is reported on the individual business owner's taxes.
Sole Proprietorship Taxes
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The tax benefits that a sole proprietorship offers includes: filings are nothing more than submitting an individual income tax return, there are no payroll taxes to deduct and accounting for various expenses is easy.
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LLC Features
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An LLC protects business owners against liability claims. The income that is received is passed through to each owner's individual taxes, meaning that each owner has a determined percentage of profits reported on their taxes.
LLC Taxes
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The tax benefits for an LLC would include: the entire profits that are made from a business are not taxed as income to owners and all of the health care premiums that are paid can be deducted.
Considerations
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The tax benefits for an LLC can vary from state to state. To determine which business entity will work best requires that everyone consult with an attorney and accountant. This will help the entrepreneur to fully understand the tax differences between both.
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