Vlad Rusz is a CPA at Centaur Digital Corp, helping busy business owners efficiently manage their accounting systems.
Registering a limited liability company (LLC) is a popular method for starting a business, with many companies providing services that make it easier than ever. After you register an LLC, however, you must tackle the issue of filing taxes for it. Unfortunately, there isn’t a simple guide to follow because an LLC can take many different forms. Luckily, there are some aspects that every LLC has to address. If this is your first LLC, here are some helpful insights to help you tackle taxes for the first time.
Bookkeeping
When you have an LLC or any business, you are responsible for accurately reporting your income to the IRS. It’s possible that you will receive a 1099 at the end of the year, depending on your clients, business setup and tax structure, but that doesn’t include your expenses. It’s up to you, as the business owner, to ensure you are accurately tracking all the money going in and out of your business and to file your taxes at the end of the year.
Tax Structure
There is no such thing as an LLC tax structure. The tax structure, or how you file your taxes, for an LLC is determined by how many members the LLC has as well as potential tax elections. A single-member LLC is considered a disregarded entity and thus would file taxes along with the owner’s tax return; if the owner is an individual, then they are taxed as a sole proprietor.
A multimember LLC is by default taxed as a partnership and would be required to file a Form 1065 tax return. In addition, LLCs can elect to be taxed as S-corps or C-corps, which file Forms 1120S and 1120, respectively. Electing the best tax structure for your business can have major tax implications and should not be left to the default designations without a comprehensive review.
Taxable Income
LLCs that are taxed as either sole proprietorships, partnerships or S-corps will have a flow-through tax structure. This means that at the end of the year, the net income from the LLC is transferred to the owners, who then pay tax on this income. The LLC itself does not pay any income tax. The exception is LLCs taxed as C-corps, which pay income tax at the corporate level but are then subject to dividend tax for any distributions to its owners.
Owner Wages
The tax structure of an LLC will also impact how the owner is paid. An LLC taxed as a sole proprietor doesn’t pay the owner wages; rather, any money sent to the owner is considered a distribution. An LLC taxed as a partnership must show any wages on the K-1, which is part of the Form 1065 tax return, in the form of guaranteed payments.
Any LLC that is taxed as either a S-corp or a C-corp is required to issue a W-2 to the owner for any wages paid. In addition, corporations have to determine what a reasonable wage is, which typically requires the help of an accountant.
Distributions
In addition to wages, owners can receive distributions from their businesses. An LLC taxed as a sole proprietorship essentially treats any money taken out of the business by the owner as a distribution. An LLC taxed as a partnership as well as an LLC taxed as an S-corp would show the distributions on the K-1.
An LLC taxed as a C-corp would have to issue a 1099-DIV for any distributions paid out since these are dividends. The benefit of a flow-through tax structure for sole proprietorships, partnerships and S-corps is that distributions are typically tax-free.
Annual Reports
While not strictly a tax return, each state can have specific requirements for reports and fees required to keep the LLC in good standing. If you use a professional service to register your LLC, they typically offer a maintenance plan to keep your LLC active, but if you DIY it, be sure to keep track of your state’s requirements.
In addition, if you’ve registered your LLC in a state other than your state of residence, you’ll likely need to also register in your home state, since most states require businesses to register if they have a physical presence in the state.
Filing taxes for your LLC for the first time can be a daunting task. There are a plethora of documents and transactions to keep track of without neat reports like a pay stub or W-2 received by an employee. Fortunately, this process doesn’t have to be complicated, and once you have the right systems in place, it can be simple to maintain.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Read the full article here
