This myth has been floating around social media for years: “create your LLC so you can start saving on taxes!” But it’s simply false. The Limited Liability Corporation (LLC) is a state designation and serves as a protective wrapper around the owner’s business or real estate holdings. By default, an LLC is set up as a sole proprietorship if a single member or a partnership if multiple members.
You receive the same tax deductions with or without the LLC “wrapper” of legal protection. The single member LLC reports business income and expenses on the taxpayer’s personal tax return on the small business Schedule C. If there are multiple members, the LLC would report business income and expenses on a partnership Form 1065 tax return.
The tax savings from an LLC come from an S election made with the IRS to have the LLC taxed as an S corporation. The S corporation allows you to control how the business net profits are taxed and save 15.3% on the dreaded SECA taxes (the employer and employee portion of Social Security and Medicare). The net profit of the business is split between distributions and officer compensation W-2 wages. The amount that passes through to the taxpayer’s personal tax return on Schedule K-1 is the amount that saves 15.3% on SECA Taxes.
Curious to know if your LLC should be an S Corp? Contact us today to find out more.
