As you set up your new business, you will start making multiple decisions about how to run it. As the owner of the business, you will plan the budget, decide on which expenses are necessary, determine the location of the business and much more. But one important decision you will make will be how to pay taxes. If you have started a limited liability company (LLC), you have a few different options to pay taxes.
Since the IRS doesn't consider an LLC to be a tax designation, LLCs have the unique ability to choose their tax designation. Each different option has different benefits. The options for LLC tax designation include:
- Sole proprietorship – If you are the sole member of the LLC, the IRS will automatically tax you as a sole proprietorship. This means that you will list all business income on your personal tax form. The IRS considers you self-employed, so you pay self-employed income tax on all the profits from your LLC. This is also known as pass-through taxation.
- Partnership – If there are multiple members in your LLC, the IRS will tax you as a partnership. A partnership is similar to a sole proprietorship in that it uses pass-through taxation. The difference is that the partners split the profit and pay taxes based on their stake in the company.
- Corporation – Instead of paying as a sole proprietorship or partnership, you can also choose to pay taxes as a corporation. Paying as a corporation can help you avoid extra taxation. When choosing this designation, you decide what a normal salary for your position would be. You only pay personal income taxes on that salary. The rest stays in your business and avoids your personal taxes. This can be help you avoid taxes if your company profits are well above a standard salary.
When deciding on the tax designation for your LLC, make sure to consult with an accountant and an attorney. Professional guidance can ensure that you will make the best decision for your company.
With a new business comes many new decisions. Making the right choices for your tax designation can help you avoid paying more taxes than you need to.