There is a lot to learn when starting your own business. Knowing how your taxes will be dealt with is a big part of the overall structure of your business. There are a few ways that a new business may choose to setup their company.
LLC stands for limited liability company. This is a business structure offering pass-through taxation and liability protection. Self-Incorporation is when a self-employed business owner sets their business up as a corporation for tax purposes.
Tax Tips for LLCs
This is a list of items that a business can deduct when part of an LLC:
- Equipment purchases and supplies used while doing business up to $100,000.
- Contributions to employee retirement plans such as a 401k or 403b
- Money spent to fund employee or member travel.
- Business training programs, employee assistance programs, and events.
- Money spent on LLC members’ and employees’ education.
- Subscriptions to newspapers, magazines, trade publications and other media related to the course of an LLC’s business.
- Fees paid for licenses and permits, as well as money paid to professional associations.
Pros/Cons for LLCs
Choosing to run your business as an LLC offers different pros:
- Limited Liability– The owner’s/members’ personal assets are protected from creditors seeking to collect from the business.
- Pass-Through Taxation– LLC is a pass-through entity, meaning its profits go directly to its members without being taxed by the government on the company level.
- Management Flexibility– An LLC can opt to be managed by its members, which allows all owners to share in the business’s day-to-day decision making, or by managers, who can be either members or outsiders.
- Easy Startup–Initial paperwork and fees for an LLC are fairly easy. There is wide variation in what states charge in fees and taxes.
Before registering your business as an LLC, consider the cons as well:
- Limited Liability has Limits– In a court proceeding, a judge can rule that your LLC structure doesn’t protect your personal assets.
- Self-Employment Tax– If your LLC is taxed as a partnership, the government considers members who work for the business to be self-employed. This means those members are personally responsible for paying Social Security and Medicare taxes.
- Member Turnover– Sometimes, the LLC must be dissolved if a member leaves the company, goes bankrupt or dies. The remaining members are responsible for all remaining legal and financial obligations necessary to terminate the business. These members can still do business but must start a new LLC.
Tax Tips for Self-Incorporating
Unincorporated businesses may be missing out on tax breaks. Here are a few:
- Benefits, such as medical insurance, travel, or daily expenses, can be deducted.
- If the company does not make money, you can deduct the losses from your income tax.
- Business items can be deducted (even a car- if it is being used for business purposes).
- Social Security tax deduction can happen when you only pay Social Security taxes on the portion of the business income you take as salary.
Pros/Cons for Self-Incorporation
Incorporating your business can help in these ways:
- Limited Liability– This helps shield the owner(s) from any personal liability.
- Continuance– A corporation has an unlimited lifespan. It continues to live on even if the shareholders leave the business or pass away.
- Flexible Income–Incorporating your business allows you to be a little more flexible when it comes to distributing income. You can determine how and when you receive income.
There are disadvantages to incorporating as well:
- Expensive–One downside of incorporating your business is the expense that comes with it. Because corporations are more complex than other structures, they tend to be more expensive to set up than other business structures.
- Double taxation–Double taxation is when you must pay income taxes twice on the same income. This means you’re taxed on both personal and business levels.
- Paperwork–Incorporating your business involves a lot of paperwork. Make sure to review all the records needed to maintain your corporation.
While there are advantages and disadvantages to both, it’s a smart choice to consider protecting your new business.
LLC vs. Self-Incorporation: What’s the difference, and how do you Start?
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