What are the tax advantages and disadvantages of an LLC?


Quick Answer

One tax advantage of an LLC is that members are able to decide how they are taxed, since an LLC isn't classified as a separate entity, says Christina Dixon of RocketLawyer. A disadvantage is that members pay self-employment tax if they decide not to file as a corporation.

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Full Answer

Options for how members of an LLC are taxed include single-member LLC, partners in an LLC and LLC filing as a corporation, notes Dixon. A single member is taxed the same as a sole proprietorship where losses and profits are handled through a personal federal tax return. The partners in an LLC classification are treated as a standard partnership, while filing as a corporation classifies the LLC as a regular corporation. Depending on the circumstances, the company may automatically be classified as a corporation by the IRS.

If members of an LLC opt to be taxed separately, they have to list all profits on a personal federal tax return. The main disadvantage of this option is that single-member taxes are usually higher than those of a corporation, says Dixon. Single members also have to pay Social Security and Medicare fees. It's best that members of an LLC speak with a knowledgeable attorney and accountant about the best way they should be taxed before making a final decision.

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