Are you a single owner or an active member of an LLC (Limited Liability Company)? Are you looking to transform your company to a multi-member LLC? Whatever it is, you will have some questions on the tax part of your business.
Below are a few things you need to know as an LLC owner:
Tax laws for LLC- Basic:
Firstly, it is very important to know the way in which an LLC is structured as stated by the tax law. Corporation and LLC are very different in terms of taxation. An LLC is not considered and taxed as a separate business unit and all the profits & losses go to each member of the company. The members of LLC must file their profits and losses on their personal tax returns, like any other owners of the partnership. The business doesn’t need to pay the federal taxes. This rule is not applicable in all the states, though; there are a few states who want LLCs to pay taxes annually.
Based on the number of members in an LLC, the Internal Revenue Service will consider the business as a sole proprietorship or partnership. But in some cases, the LLCs would automatically be classified as corporations by the tax laws and be taxed. Those companies that are not classified automatically can the business entity they would like. In order to do that, the company must file Form 8832.
Single Member LLCs and their taxes:
If you operate a single member LLC, the Internal Revenue Service would consider your business as a sole proprietorship (except if you choose to be the corporation). In this case, you will have to file all the profits and losses in your personal tax returns on attaching Schedule C and report it with 1040 tax return.
Read on to know more about when you must be filing using EIN (Employer Identification Number) and when you must be using your social security number.
Multi-member LLCs and their taxes:
If there are multiple owners in your LLC, the Internal Revenue Service will consider it as the partnership (except if you want it to be considered as the corporation). Similar to the single owner, the business doesn’t pay the taxes, but each owner of the business has to divide the profits and pay the tax on attaching Schedule E.
You would have to file the Form 1065 with the Internal Revenue Service. This form would aid them in determining if each member is reporting the correct profit amount. The company must also provide each partner with a report mentioning their share of income, deductions, and credits. The individual member should then report the same on their personal tax returns.
You will have to request “special allocation” from the Internal Revenue Service if the LLC does split the profits and losses in a way that doesn’t match the individual’s percentage interests. And this is something you must consult with a tax lawyer or an accountant.
Paying the Estimated Taxes
The LLC members and owners are considered to be self-employed, and hence they are subjected to file and pay the estimated amount of tax to the IRS and the state tax office quarterly.
If your LLC is a multi-member one and the owner is not active in the company that is if they have invested in the company but doesn’t participate in the operations, then the owner might be an exempt from paying the federal taxes for self-employment. Your tax lawyer or accountant will be able to tell you if your business meets the requirements for the same.
Tax for sales
Sales tax is something imposed by the local and state governments on the point- of- purchase. The buyer pays at the time of purchase and you [small business owner] will assess, collect, and pass the tax to the concerned authorities within the time period recommended. The laws and rates for the taxes will vary depending on the state; this leads to disarray particularly if you have customers in over 1 state.
If you run an LLC, you will have to pay to the state like you do to the IRS. Some states charge the LLC based on the income, apart from the income tax paid by the member. Other states charge the LLC an annual fee that is not related to the income; this is also known as the franchise tax, renewal or registration fee. It is ideal to check the laws in your state before forming an LLC.
Contact Joyce at +1-516-717-2049 for consultation.