Knowing the differences between the available taxation options for your company can help you maximize your profits and minimize your tax liability. If you form an LLC, there are two default options depending on whether you are a single member LLC or you are a multi-member LLC. However, you can also elect other forms of taxation in lieu of the default taxation, such as choosing to be taxed as an S-Corporation.
Default Taxation Options for LLCs
For a single member LLC, the default rule is that your LLC is treated as a disregarded entity. For a multi-member LLC, the default rule is that your LLC is taxed as a partnership Whether your LLC is taxed as a disregarded entity or a partnership, the default taxation rules mean that all of the profits from the company are taxed to the members individually. However, there are some pros and cons to this form of taxation:
- Pros
- Easy tax filing; and
- Maintaining the limited liability of an LLC.
- Cons
- Self-employment taxes in addition to business taxes; and
- Employment and excise taxes.
S-Corporation Taxation for LLCs
An LLC can also choose to be taxed as an S-Corporation. S-Corporation taxation is similar to that of disregarded entity or partnership taxation because the profits from the company are taxed to the members individually. However, S-Corporation taxation has several key restrictions and differences as follows:
- Members can only be individuals (companies and trusts cannot be members);
- Members can take a salary to reduce the self-employment taxes they will pay; and
- The tax filings are more complex and costly.
To learn more, and for help selecting the ideal taxation structure for your business, contact the experienced business lawyers at Maiello, Brungo & Maiello, LLP.