You’ve made a decision to start a new company! Congratulations! Now comes the hard part – which one do you become? An S-Corp? An LLC? So many choices! There are multiple ways to classify your business and each classification offers some benefits that may be advantageous for taxation purposes. An LLC is one common classification that combines the benefits of sole proprietorships, partnerships, corporations, as well as limited partnerships. Whether you own your own business or are a partner of a business, it is worth taking the time to understand how an LLC could protect you from unnecessary liability, as well as make taxation of your company more simplified.
Types of LLCs
A business has multiple choices for what classification of LLC can be elected. Within those choices are requirements and in some cases default elections:
- LLCs Classified as Partnerships: Requires at least two members to maintain classification. The partners should designate a member manager to be responsible for tax matters. If partnership drops below two members, the classification will default to a Disregarded Entity.
Example: Tom and Nick own a landscaping Services business classified as a Partnership LLC in Pasadena. Tom decides to buy out of the partnership. The classification for the LLC will have to change to a Disregarded Entity.
- LLCs Classified as Disregarded Entities: Requires one-member owner to maintain classification. This classification requires the owner to report income, deductions, gains, losses, and credits on the owner’s tax return. Rather than being considered an employee of the LLC, the owner is treated in a similar manner to a sole proprietorship.
- LLCs Classified as Corporations: Can have either a single member or multiple members. This classification requires either electing to classify as a C Corporation or an S Corporation. Taxation varies depending on which Corporation Classification is selected. However, classification changes must be approved by the IRS using Form 8832.
These classifications are not permanent as subsequent elections for classification can be done after prescribed periods when your business structure changes.
Still a bit confused? That’s okay. MiklosCPA knows that the IRS has some rules which are difficult to figure out. Our California-based firm can help you determine if an LLC is appropriate for your business and which classification would maximize benefits to your business. At MiklosCPA, we have helped businesses with their tax and accounting needs through our “virtual office” services. Give us a call to learn about how we work and how our services can benefit your business.
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