Limited Liability Companies offer entrepreneurs a range of tax and legal benefits. Entrepreneurs seeking the flexibility in management of a sole proprietorship and the legal protection of a corporation are well suited to LLCs. Pass-through taxation laws allow LLC owners to file the taxes of their business with personal taxes.
LLC Tax Classification
LLCs have multiple options when filing taxes. Owners may be unaware of election rights, however, and receive a default tax classification. LLCs with two or more owners default to a partnership tax classification status. Single-member LLCs automatically receive a tax classification of sole proprietor. Both default classifications grant owners the benefit of pass-through taxation. Owners may elect to change their tax classification status to that of a corporation using Form 8832. Corporations are not allowed pass-through taxation privileges.
Sole proprietors and partners are considered to be one and the same as the business entity. This means owners are subject to personal taxation on company profits. Alternatively, owners also receive personal tax benefits when an LLC owner experiences losses. The ability to benefit from losses or profits of an LLC on a personal tax return is called pass-through taxation.
LLC owners who file as partnerships or sole proprietors use Form 1040, or Schedule C, to report the profits and losses of their business. Your Schedule C is submitted as a part of a personal tax return. Schedule C itemizes all the business expenses you want to deduct for the year. You may elect to depreciate business assets over time or claim a one-time tax deduction.
Single-member LLCs enjoy a simplified process for reporting losses and gains of the business. The owner claims all losses or profits on his or her tax return. LLCs with two or more members, however, must determine how profits and losses are allocated to ensure data is accurately reported to the IRS. The amount of profits or losses a member can claim in a multi-member LLC is typically detailed in an Operating Agreement when the company is formed. Each member takes a percentage based on his or her percentage of ownership.
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