Sole proprietors and single member LLCs (SMLLCs) are the two most common entities by which single member businesses file federal and state taxes. Both pay personal income tax on business profits, file a Schedule C, and pay self employment tax on their bottom-line profits.
However, SMLLCs offer owners a few important benefits that sole proprietorship does not.
1. Tax Planning and Key Benefits OF SMLLC
Compared to the other typical ways for individual owners to do business (as corporations or as sole proprietors), the SMLLC offers key advantages in terms of lower expenses and protection from lawsuits.
While state laws differ, entrepreneurs who choose the SMLLC structure will notice several ways in which this particular kind of entity is different from a standard sole proprietorship:
- SMLLCs are "pass through" entities, in which owners pay tax on distributions on their personal income tax returns.
- Most states do not impose a business tax on SMLLCs, nor is there any federal tax imposed at the business level.
- The informal structure does not require boards of directors, shareholders, or meeting minutes.
- You can file in any state, even one other than where you do most of your business.
- The LLC form protects your personal assets from debts, tax liens, and other financial obligations ( these are the main advantages SMLLCs have over sole proprietorships).
- It's simple to file the initial formation paperwork in the state of your choice and the fees for doing so are quite low.
- SMLLC owners can hire family members and friends for short-term jobs and deduct the expense directly from business profits.
However, the only way SMLLC owners can reap the tax benefits mentioned above is by staying on top of changing IRS regulations. So, while SMLLCs offer owners a simple, low-cost way of doing business, tax planning for this entity requires owners to be aware of where every dollar goes each day of the year.
2: How To Execute Your SMLLC Strategic Tax Planning Strategy
Single member LLC tax planning is more complex than filing an accurate and timely return with federal and state authorities.
As stated above, It requires monitoring hundreds of expense categories, year-round, in order to legally minimize your tax burden.
Federal laws and IRS regulations pertaining to small business deductions change regularly and is one reason that the majority of SMLLC owners don't take advantage of maximizing their deductions. So, we at Fusion CPA make it our goal to educate and guide business owners toward a financial future of strategic planning. We go beyond complaint services to help our partners grow and expand. Our tax planning services are comprehensive. We analyze, plan, and execute — based on your specific needs. There's never an obligation to speak with a Fusion CPA team member. We're always happy to answer your questions. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.