Simple overview of tax options for LLCs

If you operate a business as a Limited Liability Company (LLC), the. you have some choice in how to have your business earnings taxed. There are protocols and restrictions that are not covered here in this post. This short post overviews the most common options, advantages and limitations of tax options available to LLCs.

Sole proprietorship– this is the simplest method with the lowest bookkeeping, advisory and tax filing costs. For those with higher earnings, this results in the highest tax.

Partnership – used when there is more than one owner. Allows partners the discretion on to decide how to separately allocate different tax attributes. Bookkeeping is usually similar to a sole proprietorship but tax accounting options are more complex.

S-corporation – allows some business earnings to escape self-employment tax. Requires more documentation and all share ownership must be addressed within the accounting system.

C-corporation – allows the owner(s) to completely avoid tax on business earnings either temporarily or permanently. Also allows the most generous tax-free benefits to owner-employees. The disadvantage is that business earnings are taxed a second time when withdrawn other than a qualified stock sale. Requires a long term commitment, competent business planning and usually a tax adviser in a leadership role to realize tax free gains of stock shares.

In any case, the only way to exercise any option in LLC taxation is to actively take tax planning steps in advance. None of these tax treatments can be addressed ‘after the fact’.