An LLC is a pass-through entity that pays no business federal taxes, has member liability protection, and can reduce personal, federal income taxes of the members if losses are reported.
An LLC, a Limited Liability Company, is a business structure for a company. It is a pass-through entity, which means the company itself doesn’t pay any taxes, the owners (called members and member managers) do, via a Schedule K-1 form issued to the members from the LLC. The member(s) then simply reports their share of profit and loss on their individual tax return. This prevents double-taxation, something that only shareholders of a C Corporations face… when the corporation pays federal and state taxes as well as all individual shareholders on their individual tax returns. LLCs do have state-mandated requirements, like filing annual reports and paying the required fees.
In most states, an LLC is the simplest and the most flexible business structure, though its members can pay more in federal taxes on earnings that the shareholders of an S Corporation. Since the LLC’s earnings are subject to self-employment taxes, the profits reported on the Schedule K-1 are taxed at the member’s personal tax rate (which varies from 12% to 37%) plus an additional 15.3% in self-employment taxes. A shareholder of an S Corporation only pays the tax at their personal rate; there is no self-employment tax imposed. So, for-profits, members of LLCs pay 15.3% more than shareholders of S Corporations in federal taxes.
Not making money and showing loses? No income, no problem! Both LLC members and S Corp shareholders can offset all ordinary personal income with their business losses… This reduces the adjusted gross income (AGI) of the members or shareholders, which reduces their taxable income and their tax. That leads directly to a lower tax due or an increased refund.
Both LLCs and S Corps make your expenses less expensive. A cell phone an excellent example of this. A cell phone plan that costs $100 a month is a $100 per-month expense if you run a business. If you are a W-2 employee working for a company, you are paying for that cell phone with post-tax money, so you actually need to earn $125 to cover that bill.
Essentially, for every $1,000 in business-related expenses you’re paying $250 more as a W-2 employee than you would be if you started an LLC. These expenses include everything it takes to run your business; your cell phone, internet, meals, travel, electricity, and even rent.
Both LLC and S Corps are separate legal entities. This protects you and your personal assets. The LLC is solely liable for its debts and obligations; the owner of the LLC is not. If the LLC were to be sued by a creditor, that creditor could only go after the LLC’s assets and not the owner’s.