Why the LLC could be the Best Tax Option for Your Start-up
Business.
Choosing the best business entity structure for your freelance writing business is a very important first step. It can mean the difference between taking a beating on taxes and becoming financially free. Why the LLC could be the Best Tax Option for Your Start-up
Business.
Your start-up business is taking off. In fact, you just
got your first check.
Now, you need to get that money in the bank.
You don't have a business bank account? How are you going
to cash that check?
In order to open a business bank account, you need to have
your business license showing your trade name, your Federal
Employer Identification Number, and your Certificate of
Incorporation for a corporation, or Certificate of
Formation for your LLC, or your partnership agreement for a
partnership.
If you don't have these already, it's probably because you
are still trying to figure out what type of entity you
should form for your new business.
Unfortunately, it's not always easy to figure out which
entity type is best. Should you be a sole proprietorship,
partnership, LLC, S-Corporation or C- Corporation?
What's worse, you may be best off starting as one entity
type, then changing when your business grows or gets more
profitable.
If you've never gone through an entity change, I'm warning
you now that the process can be a bit painful. You have to
open new bank accounts, get a new Federal EIN, make sure
your payroll tax deposits are made to the right account,
change your 1099 information with all your customers, etc.
If you change mid-year, you could end up filing multiple
payroll and income tax returns, too.
Forming an LLC is one way to keep this process as simple as
possible.
You see, an LLC is not a recognized tax entity. It is a
legal business type, but the type of tax return your LLC
files varies by the number of members and can even change
with a simple election or two with the IRS. Since an LLC
can choose which type of tax return to file, you can choose
or change your tax type, without having to change your
legal setup or Federal EIN. This can be a major time saver
for your business.
Let's go through your options.
If you form a single member LLC (only one owner), the IRS
default is that this is a disregarded entity. Essentially,
the IRS ignores the fact that you formed a separate legal
entity for tax purposes, and you report your business
activity on Schedule C of your individual income tax
return. You file and pay taxes just like a
sole-proprietorship.
If you form a multi-member LLC (more than one owner), then
the IRS tax default is a partnership. Your LLC would file
a partnership tax return, and the income or loss would flow
through to the individual owners' tax returns. The
partnership return allows you to distribute income or
losses to partners (members) based on criteria other than
ownership percentages. This can be useful if you have
members in different tax brackets, or if you would like to
be able to distribute start-up losses to the member who
invested the most money in the business.
If you would like to have your LLC file a different tax
form, you can use Form 8832, Entity Classification Election
http://www.irs.gov/pub/irs-pdf/f8832.pdf to choose how you
would like to be taxed. Using this form, you can have your
LLC elect to file a C-Corporation or S-Corporation tax
return.
If you would like to change from the default entity type,
you should file the election within 75 days of forming your
LLC. You also cannot file the election more than once
every 60 months, unless the first time it was filed was
during the initial formation of your business. If you want
to be taxed as an S-Corporation, you also need to file Form
2553, Election by a Small Business Corporation
http://www.irs.gov/pub/irs- pdf/f2553.pdf within two and
one-half months of forming your LLC.
With an S-Corporation, the income from your business is
taxed on the individual member's tax returns based on their
ownership percentage, and members pay payroll taxes on
their wages just like any other employee. A C-Corporation
pays taxes on its income separately, but individual members
also pay taxes any wages and dividends they receive from
the corporation.
Corporations are required to keep corporate minutes, must
file an annual report, and must have an annual shareholder
meeting in order to maintain legal limited liability. The
legal requirements for maintaining an LLC can be much
simpler. It's a good idea to consult a business attorney
in your state to make sure your business is on track with
your state requirements.
If you are in a rush to get your business rolling, starting
an LLC could keep your options open. You can get your
business started right away, and still have time to consult
an accountant before you make a final decision on how you
want to be taxed. You can even change your mind down the
road, without having to change all your business accounts.
Don't forgo professional advice, but consider the LLC if
you need more time. That way, you can spend your time
building your business, rather than filling out more
paperwork!
About the Author:
Discover Why Most Businesses Fail and What Are the 10 Steps
You Should Follow to Dramatically Increase Your Odds of
Success. Todd Jensen Explains What Are the Things You Need
to
Do to Start a Successful Enterprise and How Do You Avoid
the Traps That Cause Business Failure.
FREE Details:
==> http://www.freebusinessstartupinfo.com
http://www.newein.com
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How to Build a Thriving Writing Business from NOTHING
