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What Are the Tax Advantages of Having an LLC?

by | May 26, 2022 | Firm News

I’m Neil Fridman with the Fridman Law Firm PLLC. If you’ve taken the time to watch any of the videos on our YouTube channel or have read any of our blog posts, you know that we talk a lot about business and business entities. The reason for this is that the type of entity you choose for your business will have a massive impact on your personal and business finances.

Why choose an LLC

One of the most common entities we help our clients form is the limited liability company or LLC. An LLC separates your personal assets from those of your business. But it also has key tax advantages for you as a business owner.

Today, I want to share a few of those advantages with you, and I hope this information will help you choose which entity type is right for you. Of course, you should always consult the advice of competent counsel in your jurisdiction to decide which entity to choose.

LLCs and taxes

The first thing to know about LLCs is that they are not double taxed. One of the primary differences between LLCs and corporations is how they are taxed. A corporation pays corporate taxes and the owners also pay taxes on the salary and dividends they receive.

LLCs, on the other hand, are known as pass-through entities, meaning the profits made by your company will pass directly to you and other owners without being taxed first. The term pass-through is just a fancy way of saying that your company’s income will be treated as personal income.

This is a massive deal for a small business, as both you and your business partners can potentially make more money as owners of an LLC, depending on your tax circumstances.

More options

An often-overlooked benefit of an LLC is the option to be taxed as an S corporation or another entity type. Like LLCs, sole proprietorships, partnerships, and S corporations are all pass-through entities taxed as traditional partnerships.

This means that an owner working in the business is still considered an owner instead of an employee. But choosing for your LLC to be taxed as an S corporation, for example, allows you to be considered to be an employee as the owner of the business.

Tax savings

By utilizing this option, only the wages paid to you will be subject to FICA tax for social security and Medicare. All other net earnings pass directly to you and are not considered passive income. This can result in substantial tax savings for LLC owners while still allowing you to take advantage of the flexibility of an LLC from an operational standpoint.

Writing off business expenses

Another colossal tax benefit of an LLC is the ability to write off business expenses. Owners of an LLC are allowed to take tax deductions for legitimate business expenses and these deductions are divided among owners based on their percentage of ownership in the LLC. This means you can take deductions on things like business meals and entertainment, office expenses, and even the actual formation of your business.

You may even be eligible for the qualified business income deduction, which allows LLC owners to claim a 20% deduction from their net income of their business beyond normal business deductions.

Leasing assets to your LLC

Leasing assets to your LLC could fall under the category of deductions, but it’s worth mentioning on its own. As an LLC owner, you can lease your personal assets to your business, which allows you to create more write-offs while simultaneously putting money back into your pocket.

The item that is most often leased to an LLC is a home office. If you adhere to the IRS’s guidelines, you’re allowed to lease a portion of your home that is exclusively used for business purposes to your company, and you can collect rent on the space and still write the cost off as a business expense. Similar actions can be taken with personal vehicles and other assets.