Introduction

When planning business incorporation, you may face many challenges. There are many tasks to consider carefully: the concept of the future company, market research, hiring employees, and, of course, the legal structure that best fits your business needs as well as specifics. It will determine the most important aspects of the future business, such as personal liability, profits, and taxes.

Would you like to operate as a sole proprietorship or join together to form a partnership? Maybe you are thinking about the establishment of a corporation or LLC through one of the best LLC services listed on https://bestllcservices.co/ or by yourself? Each of these business structures has its strengths and weaknesses.

In this article, we will discuss the pros and cons of LLC formation in terms of taxes and ease of business growth and development.

Why do people decide to create an LLC?

Who might be interested in LLC formation?

Limited Liability Company (or an LLC) is a unique hybrid business structure that perfectly combines the pass-through taxation of a sole proprietorship or partnership with the liability protection of a corporation.

Unlike sole proprietorship and partnership, an LLC company is a formal business structure. This means that just getting started is not enough to set it up. To comply with the law, you have to follow state procedures by filing the formation documents and paying the required registration fee.

When is LLC incorporation relevant? For example, if the business you plan to open involves high liability risks. In this case, launching an LLC will help separate the personal assets from the corporate ones and provide the owner with legal protection.

Additionally, clients and partners treat an LLC as more reliable and reputable, so business incorporation is a good way to increase your credibility.

Finally, if you begin as a sole proprietorship or partnership, changing to a limited liability company may be the best option for your business growth and development. Compared to a corporation, LLC formation and maintenance takes much less effort, money, and time. You don’t have to handle numerous internal paperwork.

If you are ready to start the official process of setting up an LLC company, there are two ways to do it:

• On your own, using the online guide. Undoubtedly, the DIY method can save you money on hiring professionals. However, it is important to know exactly what documents are required in your state, how to fill them out correctly, and where to submit them. Otherwise, instead of saving money, you may face a rejection of the application, which will delay the process of opening a business;
• Hire one of the LLC formation services or a business attorney. Both of these options ensure flawless preparation and filing, increasing efficiency, and saving you time. Nevertheless, the cost of LLC formation services is much cheaper. While lawyer prices range from $500 to $2,000, the average price of LLC incorporation companies ranges between $0 and $800.

Tax benefits of the LLC formation

There are many advantages of an LLC as a business entity that make it attractive. These include the following:

1. Tax flexibility: By default, the IRS treats a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership for tax purposes. However, if the owners of an LLC company meet the requirements, they may apply for a change of the tax treatment. You may choose to be taxed as a C corporation or as an S corporation and make your company as comfortable as possible;
2. The possibility of avoiding double taxation: The profits of most corporations are taxed twice: when paying corporate income tax and when distributing dividends to the shareholders. LLCs, on the other hand, are not subject to double taxation. Unless the owners have provided otherwise, an LLC company is a “pass-through” tax unit. This means that it does not pay corporate taxes, as they go “through” the business directly to the owners. The profits and losses from doing business are reflected in the personal 1040 tax returns and/or Schedule C of the participants;
3. An exemption from the corporate franchise tax: In contrast to corporations, in some states, the LLC formation allows you to avoid paying franchise taxes. This largely depends on the specifics of the particular state, so you can get more information from the IRS;
4. Tax deductions: through LLC incorporation, you can be eligible for a wide range of different tax deductions. The most common of them include the following:

• Charity: Like corporations, taxable LLCs may deduct up to 10% of income received as charitable contributions. Excess donations that do not fulfill the conditions for a tax deduction at this time may be postponed for 5 years;
• Health insurance: The owners involved in the management of an LLC company are entitled to deduct their health insurance payments. This also applies to the health insurance of their spouses and dependents;
• Disability insurance premiums: When purchasing disability insurance for the owner or employees of an LLC, its cost can be deducted tax-free;
• Business Motor Vehicle Deductions: The establishment of an LLC allows you to reimburse the current IRS-approved corporate vehicle mileage rate. During the first three years, this deduction can be up to $35,000;
• Insurance: The cost of workers’ compensation insurance and professional liability insurance may be deductible. Consult with your insurance agent to find out which types of insurance are relevant to your LLC company;
• Home Office Deductions: If the home office is regularly used for administrative or managerial activities, you may deduct the cost of keeping it. With the business formation of an LLC, you have the right to compensation for storing documents, inventory, or supplies in your home office. Deductions may include cleaning, maintenance, homeowner’s insurance expenses, as well as utilities and phone bills;
• Tangible property: If you purchase property that will be used by the LLC company in conducting business, you can deduct up to $1 million in the year of the purchase. This applies to computers, software, heating and air conditioning systems, alarm systems, etc.;
• Retirement plans: Deductions are allowed for payments to various retirement plans;
• Children: When an LLC is formed, the owner’s minor children can receive tax-free deductions for working in the business after school or on vacation;
• Education: Deductions for the education of employees are allowed up to the amount established by law.

Tax disadvantages of the LLC formation

In addition to the benefits, of course, LLC incorporation has some downsides. For example, self-employment taxes, which include social security and health care. If the company is managed by the owners, the state treats them as self-employed individuals rather than as employees. Therefore, an LLC company is responsible for paying self-employment tax, the amount of which depends on the profits and is calculated at a rate of 15.3%.

Conclusion

Every business is unique, so it is impossible to say that an LLC incorporation is the best option. However, in most cases, a limited liability company is really a great choice. Because of its hybrid nature, an LLC offers both tax flexibility and limited liability.

If you hesitate which business structure fits best the peculiarities of your enterprise, then consult with an experienced accountant before proceeding with the business formation.