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How to Choose the Right LLC Business Structure

June 16, 2024
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When starting a small business, choosing the right structure is crucial for optimizing tax advantages and ensuring compliance with IRS regulations. A Limited Liability Company (LLC) offers flexibility and various tax options that can significantly benefit your business. A San Antonio TX CPA like the Gonzales Group can help you set up the right LLC for you, but this will give you a head start.

A single-member LLC is treated as a “disregarded entity” by the IRS for tax purposes. This means the LLC’s income and expenses are reported on the owner’s personal tax return using Schedule C (Form 1040). This structure simplifies tax filing and avoids double taxation, as profits are taxed only once at the owner’s personal income tax rate. Additionally, single-member LLCs can benefit from tax deductions for business expenses, home office deductions, and retirement plan contributions.

For businesses with multiple owners, a multi-member LLC is typically taxed as a partnership. This structure allows profits and losses to pass through to each member’s personal tax return, also avoiding double taxation. Each member reports their share of the LLC’s income on Schedule K-1. The LLC itself files Form 1065, an informational return, to report its financial activities. This structure provides flexibility in profit distribution and allows each member to benefit from tax deductions proportionate to their ownership interest.

An LLC can elect to be taxed as a C Corporation by filing Form 8832 (Entity Classification Election). This option might be advantageous for businesses planning to reinvest profits or scale significantly. As a C Corporation, the LLC pays corporate taxes on its profits using Form 1120, and shareholders report dividends on their personal tax returns. Although this leads to double taxation, it allows for a broader range of tax-deductible expenses and benefits such as health insurance and retirement plans for employees.

To avoid double taxation while retaining corporate benefits, an LLC can elect S Corporation status by filing Form 2553 (Election by a Small Business Corporation). S Corporations allow profits and losses to pass through to owners’ personal tax returns, similar to a partnership, but with the added advantage of potential self-employment tax savings. Each owner must report income on Schedule K-1 (Form 1120S), and the S Corporation files Form 1120S to report its activities.

When deciding on the best tax structure for your LLC, consider factors such as the number of owners, growth plans, and potential tax savings. Consulting with a San Antonio TX CPA, such as the respected CPAs at Gonzales Group, can provide personalized advice and ensure you select the structure that best fits your business goals and compliance needs. To help you choose the right tax structure to optimize your tax advantages and more, contact us today to get started.

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This post was written by Gonzales Group CPA


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