The Limited Liability Company (LLC) entity is a good choice for small businesses to avoid personal liability but understanding certain key aspects of tax management is important, or there could be financial consequences. Read on as we discuss a few of the most important factors in that regard.
Single-Member LLCs Must File Form 8832: Entity Classification Election
Single-member LLC owners can enjoy immunity from personal liability, even in the case of business tax debts, but only after filling out the Entity Classification Election form, aka Form 8832. The form must be filed in due time, or the Internal Revenue Service (IRS) will automatically have the right to seize personal property for settling tax debts via a tax levy.
If you have been notified by IRS for the same, immediately contact your tax consultants to help with a tax levy. There is a 21-day period, during which IRS will send out multiple notifications to the key people associated with a business in tax debt. Ignoring them will only increase your financial problems further.
If You have Partners, Get to Know Form 1065 Partnership Returns
A multi-member LLC will be taxed differently in comparison to a single-member LLC. The following should provide an idea regarding how it’s done.
- The LLC must have an Employer Identification Number (EIN), which needs to be applied for by filling out Form SS-4
- Form 1065 Partnership Returns must be filed on an annual basis
- Each of the LLC members must also file Form K-1 individually to report the revenues, profits, and losses
A small LLC with two or more partners will need to understand the workings of Form 1065 more thoroughly with the help of a business tax consultant.
Consider Applying for an S-Corporation Status
If you can incorporate a Subchapter S, then the annual taxes paid will be lower, as the total due amount would get divided among shareholders in adequate proportion. Most LLCs do not have a structure to take advantage of this, which is why it’s a more common practice for qualifying C-Corporations. However, if your LLC does have stock options and holders, take into account the following.
- Form 2553 must be filed with the IRS within 75 days from the company’s incorporation date
- LLCs willing to change their entity structure to S-Corporation will have to fill in the form within 75 days of the next financial year’s beginning
- The S-Corporation will no longer be subject to employer taxes
Deductions and Rebates
There are several factors to be taken into account before calculating tax deductions, but in general, insurance premiums (health, disability, etc.), green initiatives and certain charitable donations (10%) are deductible to a certain extent. It is possible that you might be paying more tax than you should, so the deductibles are definitely worth talking about with your accountant.
If your business is still not registered, then the sole proprietor or all partners of the business will be held personally liable for any business or tax debts, along with associated interests and fines. It’s a risk that’s just not worth taking, even if you have a one-man operation.