One of the biggest benefits of running a business through a limited liability company is the automatic qualification of pass through taxation. Unlike an S corporation which requires that certain conditions be met and maintained in order to get pass through taxation, an LLC automatically provides this.
Why is this better than other tax options?
Well, it is not better in all cases. Some businesses are better off with corporate taxation and the ultimate decision depends on each case, but in most small business cases, pass through taxation wins out.
Here are some fundamental basic attributes:
1. Profits made by the business are passed through to the owners so the LLC itself does not pay taxes on profits. This avoids the double taxation of the corporate tax structure and often allows owners to keep more profits.
2. Losses are passed through. Generally, if a business generates losses in a year, those losses pass through to the owners and if the owners have other income, they can benefit from having the losses offset other income in the current year. There are some limitations so check with your accountant.
3. Contributions can generally be made by the members to the LLC at any time without tax consequences.
4. The LLC files an informational tax return but pays no income tax, instead items of gain, loss and other tax attributes are passed through to the members. With a single member LLC, there is no return at all and all tax reporting is done on the individual’s personal return.
5. Pass through taxation through an LLC also presents some opportunities for tax planning among members. This is an incredibly complex area and you should consult with your tax attorney or accountant, but one of the reasons the wealthy use LLCs so often is because of the tax flexibility offered.