One of the most sought-after LLC benefits is its pass-through tax classification. The pass-through classification means that LLC owners are not required to file a corporate tax return, but rather simply report profits and losses on their own individual tax return.
Therefore, the individual avoids the double taxation that corporations are subject to, in which taxation occurs at both a corporate level and individual level. Corporations receive this double taxation because of the legal separation between the company and its members. LLC members avoid this distinction and as a result incur the profits and losses as their own. There are many reasons for which people choose to form LLCs and understanding their taxation advantages and practices can benefit both multi-member and single member LLCs alike.
The default classification for LLCs determined by the IRS is the pass-through classification. However, there are different forms of the pass-through classification that might apply to your business.
Disregarded Entity: If your LLC has only a single-member, then it is considered a disregarded entity much like a sole proprietorship. For tax purposes, this means that the single owner of the business is not recognized as separate from the entity.
Partnership: If your LLC has more than one member, then the company is considered a partnership. In this case your company does not pay any taxes, but the owners do by reporting the income to the IRS on their K-1 statements. This practice is done to ensure truthful reporting of earnings among the owners.
It is important to understand that both LLC owners and members are
considered self-employed and therefore aren’t subject to tax
withholding. This means that each individual member must pay
estimated self-employment taxes to the IRS and Florida state
office on a quarterly basis.
In some cases, with multi-member LLCs, it is possible that an owner be exempt from paying self-employment taxes if they do not have an active role in the LLC. If you are uncertain about an owner’s role and classification, consult a CPA or attorney for an expert opinion.
It is possible to achieve income tax savings through your LLC by shifting income between members in higher tax brackets to those in lower tax brackets. Additionally, it is possible that your LLC experiences franchise tax savings not otherwise available to different entities, though this depends on jurisdiction. Advice from a CPA or attorney can help you determine this.
Distributions for your LLC operate differently from that of a
corporation. Members do not own shares of stock in the business
like they would a corporation. Distributions will partly be
dictated by the
operating agreement. There are
several ways to make distributions to your LLC members:
Management Fees: Any managers that the LLC has are allowed payment of management fees for the service they provide the LLC. Additionally, if you were to list an entity as an LLC member, the management fee for the entity can then be used to pay the salaries of its own managers.
Declare Distributions: LLC members cannot receive dividends like a shareholder of a corporation can. However, an LLC can declare distributions of income to its members at an amount proportional to their ownership interest.
Issue Loan: Your LLC can also make loans to its members at market interest rates. When the loan is created, the signed note is considered a debt for the borrower and is taxable against the borrower’s estate if not paid in full before their death. In some cases, outstanding loans like these reduce the borrower’s estate tax.
Purchase LLC Units: If your LLC has declared distributions, members can use those distributions to then purchase additional LLC units from founding members of the LLC. However, this is dependent on the founding members agreeing to sell the units. The sale of these units occurs at fair market value and therefore removes units from the founding member’s taxable estate, which provides the founding member with a source of income.
If you are interested in the tax benefits that a Florida LLC might be able to provide, enlist the services of an attorney or CPA. An expert can assist with your legal and tax classifications and ensure you are receiving every advantage and opportunity that an LLC can provide both you and your company.
Florida LLCs have more tax flexibility than a Florida Corporation. This is just one of many benefits florida limited liability companies enjoy. After formation, we recommend consulting with a book keeping and Certified Public Accountant (CPA) team to ensure you make the most of your new company and its potential tax benefits.
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