Whether it’s tax season or not, it is still important to consider which type of legal business entity will benefit your small business during tax time. Under certain circumstances, a specific type of entity called an LLC (Limited Liability Company) will provide for more favorable tax benefits for federal taxes.
Normally, when a company files as a corporation, it is subjected to double taxation-once when the company profits, and once when individuals receive a share of the profits. An LLC, however, is considered a “pass through” entity, which simply means that the LLC bypasses taxes at the corporate level. The taxes for an LLC are assessed as the profits pass through the corporation down to the members, who typically have a percentage of profits allocated to them determined by the LLC Operating Agreement.
Another advantage of an LLC is the tax benefits available regarding Retained Earnings. Retained Earnings are the profits that the company chooses to keep within the company. If an LLC expects to have a substantial amount of profits retained within the company, then they have the option to file as a C-Corporation. A C-Corp is only taxed 15% on the first $50,000 earned. Not only is this tax bracket very low for small businesses, it is also lower than personal income taxation, which means it will give you more money to put back into your company.
Before deciding on what type of business entity to operate as, small business owners should take into consideration the overall impact of selecting one type of entity over another. This decision should be based on issues like whether or not the owners are looking to go public in the future, or if they want to raise money through Venture Capitalists or Angel Investors. Decisions such as these will ultimately affect the decision to choose the type of legal business entity and the taxes that go along with it.