Q:

What are the tax advantages and disadvantages of an LLC?

A:

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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