Can you reduce your taxes by going for an LLC?
llc tax classification
One of the main reasons why you should be starting your business as an LLC is to provide extra protection to your personal assets from business liabilities. For example, if your business is sued for its bad debts, you can make sure that the lenders can not seize personal property that belongs to do. However, most small business owners wonder whether going for an LLC can help them with reducing their taxes as well.
Can an LLC help you reduce your taxes?
An LLC is usually linked with a pass-through taxation policy. In other words, the LLC itself does not need to pay any taxes. Instead, the business income will be usually passed over to its owners, or the members. The members will claim the profits and then file for taxes under their personal tax forms.
However, you still have the flexibility when you go ahead with federal tax treatments. That is because the LLC is another entity as created by your state statute. Hence, the IRS would make the LLC tax rate in the form of a corporation, sole proprietor, or partnership. It all depends on the number of members that the LLC has, and the elections made by the LLC.
Different taxable entities of an LLC Tax
Federal law would classify the LLC to be a specific taxable entity. Here are the different taxable entities that federal law defines.
- Single-member LLC
In case you are the sole owner of your LLC, and if you are reporting your business income within the Schedule C tax form, and pay your self-employment taxes on the Schedule SE form, your business will be considered as a single-member LLC. This will make your business eligible for pass-through taxation. In other words, your LLC would not need to file tax forms. All you have to do is to pay your self-employment taxes on the profits that you generate out of your business ventures.
- Multiple member LLC
When it comes to a multiple-member LLC, you will be able to have more than one member as a partner. Here, the LLC needs to report the business income through a separate tax return under a 1065 partnership. On the other hand, every partner of the LLC will need to pay self-employment taxes on the share of profits that they get separated. However, these self-employment taxes will only need to be paid when the LLC is engaging in active business or trade.
- LLC in the form of a C corporation
If your LLC is considered to be treated as a corporation, you will have to file for taxes under Form 8822. This is where you need to be mindful about corporate tax return 1120. The profits of the LLC will not be subjected to self-employment taxes. But if the profits of the LLC are divided among owners in the form of dividends, they will be separately taxed at a rate of 15%. Moreover, every LLC that is treated in the form of a C corporation would be responsible for payroll taxes on the wages that are paid to members of the LLC as well.
- LLC in the form of an S corporation
Here, you will have to file for 1120S tax returns. However, the profits of the company would not be subjected to corporate income taxes as it would happen on a C corporation. As a result, the individual LLC owners will be taxed for the relevant shares that they have on company profits.
Based on the information we shared, you can now figure out how your LLC and its members will be charged for taxes accordingly.
How to start LLC in American Samoa
Setting up a limited liability company (LLC) in American Samoa can help you establish an independent legal entity for conducting business operations and holding cryptocurrencies such as NFTs. LLCs are available in states, territories, and insular areas such as Puerto Rico and American Samoa. Also known as Limited Liability Companies, LLCs are special entities created under state laws that provide liability protection to owners involved in business activities.