Chris Stelzer wrote:
An LLC is actually a Limited Liability Company, no corporation.
Whew, I'm glad someone cleared that up - thanks Chris.
LLC's can be one of three types:
LLC sole-member - works as a sole-proprietorship (use a schedule C with your 1040 taxes)
LLC corporation - works as a corp (usually an "s corp" - uses form 1120 with your 1040 taxes)
LLC partnership - not as common, more for real estate properties, etc.
Getting and keeping a license as an LLC requires a little bit more paperwork and fees than as a straight sole proprietor with no LLC. And then LLC's that are corporations have more requirements than the sole-member LLC's.
Jonathan_Byron wrote:
LLCs have the benefit of not being subject to any corporate taxes (no 'double taxation') - if a permie proprietor or LLC owner makes $40,000 of sales, has $10,000 in expenses, then they pay tax on the net of $30,000. If a corporation were used to generate that same net $30,000, they might first have to pay a tax on it as corporate profit and then the person would pay income tax on what is left. More or less might end up going to the corporation owners (depending on a thousand accounting variables that might zero out the corporate tax) but that would not be less complicated - a corporation would create an additional layer of forms to fill out.
This part could use some clarification. Only the sole-member LLCs are not treated as corporations. And, while it seems that corporations have a double tax, if you're paying yourself payroll through the corporation (which is actually required and if you don't already have employees, be aware that this is an additional time and overhead expense to do), you actually save on taxes.
Using the $30,000 profit scenario, in a corp, the $30,000 "income" would be paid this way:
$27,868.09 gross wages (actual pay would be less employee's portion SS/Medicare & any withholding)
+$ 2,131.91 employer SS/Medicare taxes paid to IRS (along with employee taxes from above)
$30,000 total cash paid out.
So corp income would be:
$40,000.00 sales
-$10,000.00 expenses
-$27,868.09 payroll
-$2,131.91 employer payroll taxes
$ 0.00 corp profit
Owner income is $27,868.09 NOT $30,000 which means less income that rolls up to the form 1040.
So if you do the corp thing right, most folks pay less in taxes. Though for smaller businesses, Jonathan is right the additional annual filing requirements and the payroll issue create additional time and expense that might eat up any little bit of tax savings.