A Limited Liability Company can be established by companies or individuals. One key reason this structure really appeals to both types of ownership is that the Internal Revenue Service allows LLC to serve as a pass-through particularly for tax purposes. If the LLC you are about to set up involves multiple owners, you can opt for tax treatment as a corporation or a partnership.
If you don’t want your business to be taxed as a partnership, you can have it taxed as a corporation. Just complete the Form 8832 or the Entity Classification Election. Members must sign the form prior to its submission to the Internal Revenue Service. File this form within one year of the election. Furthermore, include a copy of the Form 8832 when filing the LLC’s preliminary tax return. As a newly established corporation, when tax returns are outstanding, the LLC should file Form 1120 or the U.S. Corporation Income Tax Return.
Basically, domestic LLC with 2 or more owners instantly gets the partnership status for tax purposes. Domestic means that the LLC was made in the US and is held by US entities or citizens. After receiving your employee identification number, you don’t have to do anything else. Just file the partnership tax return (form 1065) when it’s due. The LLC members should use to the LLLC’s Form 1065 to ready their Schedule K-1, which they should also include when filing their individual Form 1040. Schedule K-1 lays out the partners’ share of deductions and income.
Partnership vs. Corporation
If the LLC aims to be a corporation, the LLC is to pay taxes on its revenue. Owners have to pay taxes on the dividends pair or the distributions sent by the LLC. As a partnership, the LLC doesn’t have to pay taxes. The owners pay them according to a preset proportion (based on their profit share on the LLC) even if the LLC didn’t distribute any funds to the owners. Thus, if you want bigger revenue and want to funnel your funds back to grow the business, proceeding as a corporation offers better personal tax benefits.
However, either way, LLC actually is one of the best business structures there are, especially for startups. With LLC, you can avoid double taxation. If you don’t go for LLC, you may pay tax both as a company and as an owner. Moreover, with LLC, you can select your LLC location. The costs of setting up an LLC, however, vary depending on your chosen state. LLC structure also has little to no maintenance. It’s easy to make changes along the way, like add partners or sell shares to another entity or individual. There are fewer limitations on administrative levels. Protection of assets is also way easier with LLC. When you stick to LLC, your personal assets will be secure against lawsuits pointed at the enterprise. And the best part of it all: the registration is easy. You can even file for your LLC online. LLC filing as a corporation or partnership is simpler than when choosing other business types.