An LLC, by default, is taxed as a “pass through” entity, where income is reported on the member’s personal return on Schedule C. An LLC may also make an election to be taxed as C corp, where your entity will be taxed as a corporation and thus subject to the 21% federal corporate tax rate, or an S corp, which is taxed much like a pass through entity, with some benefits using salary and distributions to members to avoid Social Security and Medicare taxes.
A single member entity, by default, is a “disregarded entity” according to the IRS. Essentially, they are treating you as having earned the money and are not necessarily worried about the entity itself—the tax burden will fall to you entirely. This will not affect the legal status of your LLC. If you are still following the corporate formalities and making sure to be in compliance with your own operating agreement, you will still enjoy the liability protection of an LLC if the IRS treats it as a disregarded entity. Click Here To Read More About Pass Through Taxation For LLCs in Texas.
Electing to be taxed as a C corp means that the entity will be taxed like a corporation, and be responsible for filing a corporate tax return, Form 1120, US Corporation Tax Return. The corporation will pay taxes on any earnings and you as the member will pay taxes on any salary given by the corporation. State and local taxes for corporations will also play a role in deciding to make this election as an entity.
An S corp election is more common than a C corp election for smaller LLC’s. As an S corp, the goal is to avoid certain taxes paid on salaries vs earned distributions. A modest but reasonable salary paid to the members of the LLC will be taxed like a normal salary with taxes such as Social Security and Medicare taken out. Distributions, however, will not. There are also considerations as to the Self-Employment tax when it comes to S corps that are worth discussing with your CPA when forming your corporation.
San Antonio Small Business Attorney Nathaniel Gilbert helps clients look for the right entity strategy to fit their goals and needs, using an efficient and structured approach. To learn more about Texas Business Law, Click Here. To get in touch with Nate directly, Click Here.
