Why the LLC Could Be the Best Tax Option for Your Start-up Business

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Why the LLC Could Be the Best Tax Option for Your
Start-up Business.

- by Todd Jensen

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Why the LLC could be the Best Tax Option for Your
Start-up Business.

Your start-up business is taking off. In fact, you
just got your first check.

Now, you need to get that money in the bank.

You don’t have a business bank account? How are you
going to cash that check?

In order to open a business bank account, you need to
have your business license showing your trade name,
your Federal Employer Identification Number, and your
Certificate of Incorporation for a corporation, or
Certificate of Formation for your LLC, or your
partnership agreement for a partnership.

If you don’t have these already, it’s probably because
you are still trying to figure out what type of entity
you should form for your new business.

Unfortunately, it’s not always easy to figure out which
entity type is best. Should you be a sole
proprietorship, partnership, LLC, S-Corporation or C-
Corporation?

What’s worse, you may be best off starting as one
entity type, then changing when your business grows or
gets more profitable.

If you’ve never gone through an entity change, I’m
warning you now that the process can be a bit painful.
You have to open new bank accounts, get a new Federal
EIN, make sure your payroll tax deposits are made to
the right account, change your 1099 information with
all your customers, etc. If you change mid-year, you
could end up filing multiple payroll and income tax
returns, too.

Forming an LLC is one way to keep this process as
simple as possible.

You see, an LLC is not a recognized tax entity. It is
a legal business type, but the type of tax return your
LLC files varies by the number of members and can even
change with a simple election or two with the IRS.
Since an LLC can choose which type of tax return to
file, you can choose or change your tax type, without
having to change your legal setup or Federal EIN. This
can be a major time saver for your business.

Let’s go through your options.

If you form a single member LLC (only one owner), the
IRS default is that this is a disregarded entity.
Essentially, the IRS ignores the fact that you formed a
separate legal entity for tax purposes, and you report
your business activity on Schedule C of your individual
income tax return. You file and pay taxes just like a
sole-proprietorship.

If you form a multi-member LLC (more than one owner),
then the IRS tax default is a partnership. Your LLC
would file a partnership tax return, and the income or
loss would flow through to the individual owners’ tax
returns. The partnership return allows you to
distribute income or losses to partners (members) based
on criteria other than ownership percentages. This can
be useful if you have members in different tax
brackets, or if you would like to be able to distribute
start-up losses to the member who invested the most
money in the business.

If you would like to have your LLC file a different tax
form, you can use Form 8832, Entity Classification
Election http://www.irs.gov/pub/irs-pdf/f8832.pdf to
choose how you would like to be taxed. Using this form,
you can have your LLC elect to file a C-Corporation or
S-Corporation tax return.

If you would like to change from the default entity
type, you should file the election within 75 days of
forming your LLC. You also cannot file the election
more than once every 60 months, unless the first time
it was filed was during the initial formation of your
business. If you want to be taxed as an S-Corporation,
you also need to file Form 2553, Election by a Small
Business Corporation http://www.irs.gov/pub/irs-
pdf/f2553.pdf within two and one-half months of forming
your LLC.

With an S-Corporation, the income from your business is
taxed on the individual member’s tax returns based on
their ownership percentage, and members pay payroll
taxes on their wages just like any other employee. A
C-Corporation pays taxes on its income separately, but
individual members also pay taxes any wages and
dividends they receive from the corporation.

Corporations are required to keep corporate minutes,
must file an annual report, and must have an annual
shareholder meeting in order to maintain legal limited
liability. The legal requirements for maintaining an
LLC can be much simpler. It’s a good idea to consult a
business attorney in your state to make sure your
business is on track with your state requirements.

If you are in a rush to get your business rolling,
starting an LLC could keep your options open. You can
get your business started right away, and still have
time to consult an accountant before you make a final
decision on how you want to be taxed. You can even
change your mind down the road, without having to
change all your business accounts.

Don’t forgo professional advice, but consider the LLC
if you need more time. That way, you can spend your
time building your business, rather than filling out
more paperwork!

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Discover Why Most Businesses Fail and What Are the
10 Steps You Should Follow to Dramatically Increase
Your Odds of Success.
Todd Jensen Explains What Are the Things You Need to
Do to Start a Successful Enterprise and How Do You
Avoid the Traps That Cause Business Failure.
FREE Details:==> http://www.freebusinessstartupinfo.com
http://www.newein.com
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