What Kind of Tax Entity is my business?
You started your own business, you became a realtor, or you are being paid as a contractor. Someone at the water cooler tells you that you should start an LLC for your business. Unfraternally that someone is not an accountant and starting an LLC may not be the best avenue for you to go down.
What is an LLC? An LLC is a Limited Liability Company, its main purpose is to separate your personal assets from your business and vice versa. It is NOT a tax entity in the eyes of the IRS! When you apply for your EIN and answer the questions about type of business, you check the LLC button, the IRS is going to ask you if you are a single member or if there are more than one member. This is where the IRS determines how to tax you:
Single Member LLC = Sole Proprietor and you file a Schedule C on your personal tax return.
Multi Member LLC = Partnership and you file a 1065 Partnership return, you will receive a K-1 and whatever your percentage of the company is, is the percentage of income/loss that is what you get to report on your personal tax return.
With both Single Member and Partnership entities, you get to pay both the Self Employment tax and Income tax on your personal tax return.
I had many clients this year tell me that they created an LLC. Not knowing what they did, some of them walked out with 2 tax returns because they told the IRS that they were a multi member LLC.
Before you go and do it yourself, please talk to your Tax Preparer/Accountant to make sure you are going down the correct path, and you know all your options and the pros and cons of each type of corporation there is out there.
There are times when an LLC is a good option for you. But there are times where a S Corporation would be a better fit for you. At the end of the day, what is good for Joe Smith, might not be good for John Smith and vice versa. Communicating with your Tax Preparer/Accountant is best first step that you can make.
If you would like to learn more about the different types of corporations, and what would be best for you, please schedule a free consultation at www.pinabiz.com and I would be happy to help.