So you have an LLC but you don’t really know what that means to you legally or financially nor do you really know how it affects your taxes and your bottom line.
I read this a few months ago (courtesy of a twitterfriend of Common Cents, Ms Diane Kennedy CPA – @DianeKennedyCPA: What Tax Return Does Your LLC File? http://ow.ly/5UIKh) So here’s a summary of the scoop and a link to the original article:
There are three basic types of taxation: flow-through single-member or partnership, S Corporation and C Corporation.
Flow-Through Taxation: With flow-through single-member taxation, the LLC records income, deduct all expenses, and then flows the net income before taxes (or loss) through to the owners. …
S Corporation Taxation: With S Corporation taxation, the LLC is treated as if it was truly an S Corporation. It will file an S Corporation tax return and follow all S Corporation tax rules. That means it can split the income into both a salary stream and a profit distribution stream. Members who receive a salary will pay income and payroll taxes on that money, but will just pay income taxes on the profit distribution portion…..
C Corporation Taxation: With C Corporation taxation, the LLC is treated as though it had been incorporated as a C Corporation. It will file a C Corporation tax return, pay tax and estimated tax payments at the corporate rate, and may or may not elect to distribute profits. Members who are participating in the management of the LLC can take salaries. When the LLC-C does distribute profits out to the members it will be in the form of a dividend, just like it would if you had a corporation. That means members will have to declare and pay taxes on those dividends personally….
So which one is best for you and your business? That depends on many variables. The answer depends on you and your business. If you would like specific answers to your business structure conundrum, give us a call or call your business advisor (if you already have one). Knowing the answers to these initial questions can save you some time and money when it comes to tax time.