If you’re preparing to launch a US business, one of the first decisions you must make is your company’s structure.
You have several structures to choose from, but a Limited Liability Company (or LLC) is one of the most popular options.
Are you on the fence about starting an LLC instead of a C-corporation or S-corporation? Are you wondering which one is best for saving money and reducing your annual tax bill (especially as an overseas entrepreneur?
If so, this guide is for you.
Below, we break down the most noteworthy LLC tax benefits you should know and teach you how to start your own LLC.
How does an LLC reduce your taxes?
LLCs reduce your taxes because they’re taxed differently than individual people or married couples.
The way the US government taxes your LLC and the specific savings you get vary based on a few different factors. Here are three ways that an LLC can reduce taxes depending on the number of members and your preferences as a business owner:
As the name suggests, a single-member LLC has just one owner. The IRS (Internal Revenue Service) taxes this type of LLC as a Sole Proprietorship company.
A single-member LLC must file a Form 1040 and a Schedule C to report their business profits and losses. The filer can deduct their business losses from their tax bill and reduce the amount they owe the government.
A multi-member LLC has multiple owners. The IRS taxes these businesses as partnerships. The filing process is similar to the process for a sole proprietorship.
Members of a multi-member LLC must file a 1065 partnership return and provide Schedule K-1 forms to break down each member’s share of the business’s income, losses, etc. Each member can deduct business losses to lower their tax bill.
LLCs as corporations
If you file Form 2553, the IRS can tax your LLC as an S-Corp. You can also file Form 8832 to have your LLC taxed as a C-Corp.
Filing as an S-Corp allows you to save money on self-employment taxes. If you have an LLC, all profits are subject to self-employment taxes. If you have an S-Corp, only the business’s owner’s salary is subject to these taxes, reducing the total amount you owe.
If the IRS taxes your LLC as a C-Corp, you can take advantage of the tax benefits that come from income splitting. Income splitting is a strategy that reduces your gross income so you pay less money in taxes.
Income splitting can be a helpful way to lower your tax bill. However, it’s also complex (and if you do it incorrectly, you could get hit with severe penalties from the IRS). Most LLC owners choose not to take this particular route unless they have help from a Certified Public Accountant (or CPA).
4 tax advantages LLCs have for small businesses
Now that you know more about how the government taxes LLCs, let’s explore the specific corporate tax advantages they provide to you as a US or non-US-based business owner.
Here are four tax benefits you’ll enjoy when you launch an LLC in the US:
1. Taxation as a pass-through entity
One of the most significant benefits of running an LLC is that the IRS considers it to be a “pass-through entity.” This name comes from the fact that the business’s income “passes through” the owner and gets taxed as part of their individual income tax filing.
Nearly all of the businesses registered in the US (95 percent) follow this pass-through taxation, partly due to the tax benefits this structure offers.
Because your business is a pass-through entity, the government won’t require you to pay taxes twice. You’ll just pay taxes once when you report your profits and losses on your personal income tax returns (using Form 1040).
Conversely, if you had a C-Corporation instead of an LLC, you would be taxed twice. You’d pay taxes on the corporate level (21 percent) and at the personal level (the US tax rate varies based on your income). That’s a lot of money going to the IRS instead of into your bank account!
2. Choosing how to get taxed
As a business owner with an LLC, you also get to enjoy extra flexibility and choose how you pay taxes on your company. Some LLC owners decide they want to be taxed as sole proprietors or partnerships. Others choose to be taxed as a C-Corporation or S-Corporation.
As we mentioned earlier in this guide, there are money-saving benefits that come with each of these options.
However, most people prefer to file as a sole proprietor, partnership, or S-Corporation to avoid double taxation. The only exception, in most cases, is those who want to take advantage of the business income-splitting strategy.
3. Tax deductions for business expenses
Many business owners choose the LLC business structure so they can deduct business expenses when filing their tax returns.
No matter what kind of business you run, your expenses can add up quickly, especially in the beginning when you’re just trying to get your company off the ground.
The good news is that the IRS allows business owners to write off many of their expenses (including startup costs and ongoing operational costs) and lower the amount they pay in taxes each year.
What expenses are you allowed to deduct? The following are some of the most significant tax deductions for LLC owners to keep in mind when filing:
Rent or mortgage payments
Business owners renting or owning office space can likely deduct the interest from their monthly payments.
Home office costs
Business owners with home offices can deduct a percentage of their rent, utilities, mortgage interest, and the cost of paint and other repairs.
It’s important to note that the IRS has strict rules regarding what qualifies as a home office, so you’ll need to double-check those before deducting home office costs.
Whether you rent or own your business locations, you can deduct the cost of utilities like electricity, water, gas, and trash pickup. You can also deduct the cost of your cellphone and internet service.
Furniture, equipment, and machinery
The IRS views items that will last over a year — such as desks, desktop computers, laptops, machinery, or point-of-sale systems — as assets.
You can either deduct the asset’s entire cost in the first year after purchasing it or the cost of depreciation. Depreciation refers to the reduction of the asset’s value over time. A tax professional like a CPA can help you calculate this amount.
From pens and printer paper to cleaning supplies and folders, you can deduct the cost of the office supplies that keep your business running smoothly.
Advertising and marketing
Anything you spend to promote your brand can be deducted from your taxes. The advertising and marketing expenses list includes pay-per-click ads, billboards, and business cards.
Website and software expenses
These days, every business needs a professionally designed website. If you’re hesitant about launching a website because you’re worried about the cost, remember that those expenses are tax deductible.
You can deduct the cost of a website builder, a website developer’s fees, and the cost of domain names, web hosting, and maintenance.
Business meals and travel expenses
You can also deduct the cost of business travel or business meals (for example, taking a client to lunch). Keep in mind, too, that if you journey outside of your city’s limits, the money spent counts as a travel expense.
If your business requires you to travel by car, you can deduct the cost of gas, oil, vehicle insurance, and repairs/maintenance. You can also deduct depreciation costs if you buy a vehicle and use it for business purposes at least 50 percent of the time.
Payroll expenses include wages, bonuses, and commissions for full-time employees and contractors.
Do you offer health insurance for your employees or contribute to their retirement plans? If so, you can deduct the cost of insurance premiums. You can deduct the cost of self-employed insurance as well.
If you’re a member of any professional organizations, you can deduct the cost of membership dues. However, you cannot deduct the fees for social clubs.
Professional fees and business services
If you work with a marketing agency or have a CPA on retainer, you can deduct the cost of their services. The same goes for your lawyer, your web developer, and any other professionals who work with you throughout the year to grow your business.
Training and education
When you pay to attend conferences, workshops, or other training events, you can deduct those expenses. Remember that you can also deduct the cost of your employees’ training and education.
4. No taxes for non-US trades or business
Another important tax benefit for small business owners with LLCs is that you might not have to pay business taxes at all if you’re not involved in US trades or business.
For example, let’s say you’re the sole owner of a consulting LLC and live in India. If no one in the US works for your LLC, and your business does not earn money in the US, you don’t have to pay US taxes.
If you have a corporation, on the other hand, you will pay taxes on dividends and other taxable income earned in the United States.
Keep in mind, too, that you don’t have to be a US citizen to register your business as an LLC in the US. However, you must apply for a Taxpayer Identification Number (or TIN) or Employer Identification Number (or EIN).
After submitting your application, it takes about 18 weeks for your number to be assigned, so be sure to take this step sooner rather than later.
How to start your LLC with doola
Are you convinced that an LLC is the best structure for your US business? Are you ready to experience the LLC tax benefits listed above? doola allows you to form an LLC and start a US business in under 10 minutes.
Take these four steps to set up your own LLC with doola today:
1. Form your company
To form your company, you just need to provide a few pieces of information:
The company’s name
Your personal address (you can be located anywhere in the world)
Your email address
You don’t need to submit any documents at this stage. It takes about one week for us to use the information you’ve provided and establish your company.
2. Get your EIN
After forming an LLC, doola will get to work obtaining your Employer Identification Number (EIN).
Remember that you don’t need a US Social Security Number (or SSN). However, if you do have one, it can speed up this step.
With an SSN, it takes about one week. Without an SSN, it takes about 3-4 weeks, depending on the IRS’s processing speed.
3. Apply for a US bank account
You need an EIN to apply for a US bank account. Once you’ve obtained your EIN, you can use our custom partner portal to apply and open your own bank account.
Keep in mind that you’ll need a passport to complete this step. It takes about 1-2 weeks to complete.
4. Connect your bank account and payment processor
The last step is to connect your US bank account with your payment processor. doola helps you combine these two, so you can access payments from your customers or clients. This final step takes just a few days on average!
Form your LLC today
It doesn’t matter if you’re a foreign resident looking to start a business in the US or you’re a US citizen. You can use doola to quickly form your US company, get your EIN, and open a business bank account.
When you work with us, you’ll be ready to start working with customers and accepting payments in no time!
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