There’s no denying that Florida is a great place to live. It’s one of the most popular states in the US. Plus, it provides an attractive place to work too! More entrepreneurs are setting up LLCs in Florida each year. If that’s something you will soon be doing too some congratulations are in order.
You will no doubt have thought about many things in preparation for your new business. One of those, of course, are your tax liabilities. How much do you really know about limited liability company tax? Below you can learn more.
How many owners will your LLC have?
The amount of people that own the LLC will impact how it gets taxed. Let’s say that it will only have one owner: you. If that’s the case, you can set up your LLC to be a “C” or “S” corporation. Otherwise, it will get classed as a “disregarded entity.”
What are the main differences among the three types of legal entities for LLCs? Why is being a disregarded entity a bad idea?
Limited liability company tax rules for a disregarded entity
A disregarded entity means the IRS will treat you as a sole proprietor. For an LLC the IRS ignores the fact there is an entity (your company) between you and your income and expenses.
The IRS will consider both you and your limited liability company as one entity. As you can imagine, this can lead to certain consequences for you. One of the most notable ones is the fact you’ll be paying taxes twice!
You will get charged income AND self-employment tax on any profit that you make. The tax rates are below:
- self-employment tax – 15.3% up to $117,000, and additional Medicare taxes above that amount
- income tax – around 20%.
As you can see, you will end up paying around 35.3% tax on any profits you make. In fact, it’s likely you’ll get charged around 40% with higher earnings. Let’s say your business makes a profit of $100,000 in one tax year. The IRS will take $35,300, leaving you with just $64,700 after tax!
Limited liability company tax for C and S corporations
The other two legal entities you can select for tax purposes are C and S corporations.
C corporations pay tax on profits but at preferential rates. The amounts imposed are less than what an individual would pay as a sole proprietor.
All income stays within the company until there is a profit that can get distributed to its owners. Those distributions get carried out in the form of share dividends. The only downside is that individuals must also pay dividend taxes too.
S corporations are the preferred legal entity. That’s because there is just a single point of taxation. Only shareholders pay tax on their income; the company pays no tax. You as a shareholder won’t have to pay self-employment tax like you would as a disregarded entity.
Why it pays to seek help from a business attorney
The above is just a brief description of the different company legal entities available. Each person’s business needs will differ. That’s why it makes sense to talk to one of our business attorneys.
After all, the last thing you want to do is pay more taxes to the IRS than you need to! Talking to an attorney will help you select the most tax efficient way to set up your enterprise.