There are many reasons to explore using a limited liability company for your business, including the tax benefits. There are some drawbacks of course, but for the most part there are a number of fairly beneficial perks that make it worth considering especially for certain types of business. For the exact benefits that relate to your own situation, consult a tax professional. However, for some general information about the LLC tax benefits, read on.
The Benefit of not paying federal income tax
One of the biggest LLC tax benefits is the elimination of federal income tax. The company is not treated like a wholly and separate tax entity like a corporation would be. Instead, it is considered to be a pass through entity with the profits and losses and all of the responsibilities incurred within to be passed through to the company owners as well. While the LLC as a whole does not pay federal income tax, the individuals that make up its ownership team do.
The benefit of knowing who is getting what and why
Another of the LLC tax benefits is the Schedule K-1. This form is given to all members of the LLC and breaks down the profits and losses of each member. That way, if you think that you are not getting what you are putting in to the company, you can review the numbers and see if you are being treated fairly or not. Each K-1 must match and will be filed with the IRS as well.
Deductions made on income earned and reported
Being able to make deductions is another valuable LLC tax benefit and should be utilized to the maximum allowed amount. For instance, when an employee makes a contribution to self employment taxes, the employer (you, the business owner in this case) must make a matching contribution. Because of the tax laws, you can deduct one half that total amounts from your own income tax. In addition, you can deduct a number of business expenses as well.
Your LLC status can be a shield
Not only a LLC tax benefit, the laws protect LLC members and their personal belongings in times of bad debts or failed business. Your personal property including money that is not invested directly in the business cannot be seized to pay off these bad debts unless you have signed a personal guarantee to finance your business. If you do, you are losing all of the protection afforded to you by the limited liability company laws.