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Before you start your business with Limited Liability Company (LLC), we would like to provide more information about LLC to help you understand the structure and regulations by the government.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
Forming a Limited Liability Company (LLC)
In an LLC, owners have limited personal liability for the debts and actions of LLC, similar to a corporation. The benefits of pass-through taxation and flexibility, much like a partnership, make LLCs an attractive business structure. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company. Banks, insurance companies, and non-profit organizations generally cannot be LLCs. Your state may have other restrictions
The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return.
An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.
LLC Tax Options
Single-owner LLCs are taxed like sole proprietorships, with owners attaching a Schedule C form to their personal tax returns. LLCs with multiple owners are taxed like partnerships. Owners file a form 1065 partnership tax return, showing income allocations based on ownership percentages. You can also choose to have your LLC taxed as a corporation. This could be beneficial when you need to keep much of your cash profit in the company for business reasons.
Form a Corporation
Before you start your business with Corporation, we would like to provide more information about Corporation to help you understand the structure and regulations by the government.
To incorporate your business will enjoy a number of advantages, including:
Limited Liability Incorporating your business limits personal liability for business debts -- this means owners are not normally financially liable for business debts and court judgments.
Tax Advantages You can split business income between yourself and your corporation, thereby lowering income taxes.
Access to Capital Corporations have better access to private venture capital than any other type of business. They are also well positioned to raise capital by selling shares to the public.
Employee Perks The owners of a corporation who work for the business are treated as employees. They can take advantage of tax-deductible, corporate-paid benefits such as:
• pension plans
• stock-option and stock bonus plans
• medical expense reimbursement
• term life insurance coverage
After you incorporate your corporation, you may choose to be taxed as S Corporation or C Corporation from IRS. Below are the differences between S corporation and C corporation
• Taxation. Taxation is often considered the most significant difference for small business owners when evaluating S corporations vs. C corporations.
o C corporations. C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. Good news under Tax cut and Job act rule from 2018-2025, Corporation will tax at flat rate which is 21% no matter the amount of net income. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends. Please consult with us how to avoid double taxation.
o S corporations. S corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.
o Personal Income Taxes. With both types of corporations, personal income tax is due both on any salary drawn from the corporation and from any dividends received from the corporation.
Please consult with us for more detail how to save your tax for shareholder who work at Corporation.
Corporate ownership. C corporations have no restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes. C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.
C corporation or if the Limited Liability Company is classified as a C corporation, the following estimated tax guidelines apply.
•The estimated tax is payable in four installments.
•Installments are due and payable on April 15, June 15, September 15, and December 15.
•Corporations complete Form 100-ES to report their estimated taxes.
•Additionally, members may have to make estimated tax payments for their own reporting purposes.
If the Limited Liability Company is classified as a partnership or disregarded entity and files California Form 568, the following estimated tax guidelines apply:
•Estimated LLC fee is due by the 15th day of the 6th month.
•Members may have to make estimated tax payments for their own reporting purposes.
The LLC treated as a partnership may be required to withhold taxes if the partnership distributes California source taxable income to a nonresident member.