On average, American small business owners earn between $83,000 to $126,000, which is nothing to sneeze at. Not only is this probably higher than the salary you can draw with an employer, but it’s also a chance to make your business dreams come true.
Of course, there are drawbacks that can come with this route. Your revenue stream may lack steadiness at times, and your tax situation may not be as good as before.
So before you start a new company, what tax classification is an LLC? Read on to find out.
What Tax Classification is an LLC?
What comes as a surprise to many people is that there isn’t a single answer. Instead, there are different LLC classifications, and this offers business owners more flexibility and better tax options.
Below are the LLC tax classifications you should be aware of.
Sole Proprietorship
An LLC is technically a company, but many entrepreneurs opt for this business structure while running it all on their own. In this case, they’d be a sole proprietorship, and it’s the default tax classification for an LLC when it’s a single member one..
Here, the LLC is a single entity, but it’s also considered a disregarded entity by the IRS. You’ll report the company’s income on your personal tax return by filing Form 1040, Schedule C.
This process is pretty easy since you don’t have to file a separate tax return for the LLC. Plus, you’ll enjoy being taxed at your personal tax rate.
Partnership
A partnership is an LLC with two or more members. Like with a sole proprietorship, the LLC is considered its own entity, but it doesn’t pay taxes itself (this makes it a pass-through entity); however, it’ll still have to file Form 1065, which informs the IRS of details such as the company’s income and deductions.
Instead of a single member reporting income and paying taxes on it, in a partnership, this responsibility is distributed among all the members. In fact, it’s spread across everyone equally.
As you may have guessed, a partnership is the default tax classification for a multi-member LLC. Its main benefit is no double taxation of the company’s income.
C Corporation
If you opt for your LLC to be taxed as a C corporation, then it’ll be a taxable entity on its own. This means that you’ll pay taxes on the income you get from running the business, and the LLC will also pay taxes on revenue.
Of course, this means that double taxation is a very real possibility. This means that this tax election is only typically found with larger businesses.
S Corporation
Another tax classification for LLCs that you can choose is the S corporation. This allows you to make your company into a corporation, but without the separate taxation that C corporations come with.
The way that an S corporation is taxed is very similar to how a partnership’s taxed. All profits and losses of the LLC are divided between the LLC members, but instead of being spread out equally, they’re divided based on each member’s proportional interest.
There’s no double taxation here and LLC owners can issue stock.
What Is the Best Tax Classification for an LLC?
After reading the above, you might be wondering what the best tax election is for your company. Unfortunately, there’s no single answer here either.
What you’ll have to do is examine your personal situation, then determine which tax election works best for you. You may have to consult with tax professionals to get some sage advice. You can also speak with the experts at Business Anywhere, as we have extensive knowledge and experience.
Once you’ve decided on a tax classification, we can assist you further with our business registration service. You’ll only need to submit some vital information, and we’ll take care of the rest to get your LLC set up. This service will also include things like our registered agent service (first year free), bank account opening referral, and virtual mailbox service.
Choose the Right Tax Classification for Your LLC
As you can see, the answer to the question, “What tax classification is an LLC?” isn’t a simple one. The answers include sole proprietorship, partnership, C corporation, and S corporation.
Each tax election has its own pros and cons, so don’t just choose one since your business friends have. It’s best to evaluate your circumstances and speak to experienced pros to narrow down the wisest choice moving forward.
If you’ve decided that an LLC is right for you, then sign up with Business Anywhere today.
