One of the most sought-after benefits of the LLC 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. LLCs 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 individual and business 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. 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. However, 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.