When you set up your own business, you have a choice of operating as a sole proprietorship, partnership, corporation or LLC. How do you select which entity is most beneficial for you? Choosing the wrong form could cause unnecessary taxes, increased liability, and unnecessary exposure to lawsuits. What you should not do is listen to your neighbor or friend because each one has a different set of circumstances calling for a different set of strategies, a different form of entity. What you should do is seek professional advice to help you understand the attributes of each form and evaluate a whole multitude of confusing tax, legal and personal issues. The objective here is to set you up with a form that is tailored to your particular needs, your particular industry, and your particular business.
Limited Liability Company (LLC):
LLC is a hybrid that combines the pass-through attributes of a partnership with the limited liability of a corporation. The owners are called “members” who hold “interests” and are governed by an “operating agreement.”
There are no IRS forms for filing LLC taxes, so you have to elect to be taxed as sole proprietorship, corporation or partnership. If you chose corporation, you also have select between C and S status.
Nevada LLC taxed as a C Corporation:
Your LLC is treated like a regular C Corporation for federal tax purposes. There is a huge disadvantage in forming a C Corporation: double taxation. Your entity pays taxes at the corporate level. You pay taxes as an individual again when you receive earnings from the entity. The solution: S corporation discussed below.
Nevada LLC taxed as an S Corporation:
Make an election to be taxed an S Corporation. S corps pay zero federal tax. Most states also impose zero or low state taxes for S Corps. The net income of your company is passed on to you via K-1 and you pay taxes on your personal tax returns. In other words, you pay tax only once.
Seek advice from a lawyer, enrolled agent, financial adviser, or certified public accountant before you proceed.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].