What Are The LLC Tax Benefits For Small Businesses?

Choosing to run your business as an LLC instead of a C corporation or S corporation could give you more tax benefits for business income and business expenses. But if you’re a small business owner who is still researching LLC tax benefits, you may not yet be sure whether this business structure is right for you.

That’s why we’ve created this guide. It covers everything you need to know about LLC tax benefits and how they compare to other options like a C corporation or an S corporation. So let’s get started.

How Are Limited Liability Companies Taxed?

The first thing you should know about income taxes while running an LLC is that the business isn’t taxed directly. Instead, the LLC owners are taxed based on their ownership percentage of the business entity. This is why LLCs are often described as pass-through entities. The taxes pass through the business structure to your personal income tax.

This means that, as a business owner, your LLC’s taxable income will be split amongst its LLC members based on how much of the business they own. That’s why it’s important to think carefully when forming an LLC for income tax purposes.

How Do Business Tax Deductions Work?

You might also be interested in business tax deductions for an LLC. These work similarly to other structures, such as an S corporation. LLC owners are able to claim tax deductions for expenses directly related to the operation of the business. This can include office supplies, office rent, manufacturing components, and even hiring a tax professional to help you with business administration and LLC taxed requirements.

To qualify for this type of tax deduction, you just need to list qualified business expenses when you pay taxes. More than one owner can do this if you run a multi-member LLC in which more than one person pays taxes. However the expense deductions may be split according to your ownership percentage.

What Are The Main Tax Benefits Of An LLC?

There are several different ways that you can benefit from tax treatment while running an LLC – especially when you compare this to what a corporation pays in taxes. We cover some of the main benefits below.

Avoid Double Taxation

First, LLCs let you avoid double taxation. As highlighted previously, these business entities qualify for pass-through taxation. When you use pass-through taxation, you only pay taxes on the income your business earns once. This is a major reason why some business owners consider forming an LLC.

Choose How You’re Taxed

LLC members also get to decide how their taxable income is viewed when they file their tax return. You can be taxed as a sole proprietor, S corp, C corp, or standard LLC as long as you have an employer identification number and social security details.

This gives you the ability to choose the tax advantages that make the most sense for your income tax situation. LLC owners may want to consult with a tax professional while preparing their personal tax returns for this reason. Your gross income, self-employment taxes, tax rate, and deductions for normal business expenses including startup costs could all vary based on the type of personal tax return you file while paying your business taxes.

Deduct Business Expenses

In addition to avoiding double taxation and choosing how you file your personal income taxes, another one of the main tax advantages of running an LLC over a sole proprietorship is the ability to deduct business expenses. From office supplies to formation costs, your tax deduction on income tax returns could help you pay as little taxes as possible through your pass-through entity LLC.

State Tax Benefits

Finally, individual states can also offer extra tax advantages to LLCs. For example, when you pay business taxes, you may be able to deduct disability insurance premiums and other more expansive business expense deductions than you would be able to when paying personal taxes as a sole proprietor.

The specific benefits that your pass-through entity qualifies for will vary based on the state that it’s in. There are some situations in which an S corp may make more sense when paying corporate taxes on corporate income. But you will need to review your state’s rules to find out which makes more sense for you before you pay tax on your LLC, sole proprietorship, or S corp.

What Are the Tax Drawbacks Of An LLC?

There are two key potential drawbacks you may want to consider before turning your sole proprietorship or corporation into an LLC. The first is that profits are distributed immediately and automatically. This means you have to pay tax on them right away. A corporation may be able to hold the profits in the business and not pay tax on them until they are officially declared as corporate income.

Additionally, LLC owners are subject to self-employment taxation. Corporate income isn’t subject to this tax. That means there are some situations in which an LLC owner could pay more in taxes than a comparable corporation owner. However, you do still avoid double taxation and qualify for deductions for personal charitable contributions and other expenses like disability insurance, which can offset the difference.

The Top 2 LLC Services

Figuring out the right entity type for your business tax situation can be difficult. If you’re interested in getting some help, you may want to hire an LLC formation service. They can help you determine the best tax situation for your company moving forward and then guide you through the business entity formation process to help you take advantage of it. Here are two of our favorite providers. 

ZenBusiness

ZenBusiness can help you take full advantage of the best tax situation for your company by offering advice and guiding you through the entity formation process. It also offers after-hours customer support and ongoing assistance with taxation, accounting, and business growth.

Northwest Registered Agent

Northwest offers similar services to ZenBusiness but is slightly more affordable. It has less customer service availability but can still help you find and form the right business type for your tax goals.

Tips to Maximize Your Business’ Potential

Choosing the right business structure is the key to unlocking the full tax-advantaged potential of your business. The easiest way to do that is to consult with a professional through a service provider like ZenBusiness or Northwest. They can answer your questions, direct you to the right forms, and help you stay on top of your tax situation more effectively throughout the year.

Read More: Best Registered Agent Services 2024

Final Thoughts

Forming an LLC can help your business avoid double taxation and save money on taxes in other ways. But it’s worth exploring alternatives like corporations and sole proprietorships as well, just to see if they may make more sense for your business situation. At the end of the day, the best option may be to go through a business entity formation service, as they can help you figure out the best solution for your goals.

Frequently Asked Questions (FAQs)