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What are the taxation pros and cons of an LLC?

| Apr 22, 2021 | Business Law |

When planning out your business, one of the first things you want to do is decide what sort of structure your business will fall under. Each structure type has its own pros and cons, and you need to research them to determine which suits your unique needs best.

For example, an LLC is one structure that many find beneficial. This is particularly true when it comes to taxation. What are the biggest tax boons when it comes to an LLC? What are some things you may need to keep an eye out for?

Potential disadvantages of an LLC

The Balance discusses the advantages and disadvantages of an LLC. First, as far as disadvantages go, you will need to face the self-employment tax. This covers things like Medicare and Social Security. As an LLC owner, it is up to you to pay both the employee and employer portions of the self-employment tax, which is often quite high.

You also need to pay taxes on your share of distributable property. You must do this even if you did not actually get your share of the profits. In comparison, owners of corporations do not need to pay taxes on their shares unless the shares got distributed.

Tax benefits associated with LLCs

But there are benefits, too. First, you may get tax deductions only available to small businesses. You can get a tax break of up to 20 percent of your income. You also get to avoid double taxation this way. Finally, some states do not require LLCs to pay state corporate franchise taxes. As you see, either option has its potential net gains and losses for your consideration.