- September 1, 2016
- Posted by: Smith & Smith
- Category: Federal Income Tax Preparation, LLC Partnership, S Corp and Partnerships
Starting out as a new business, the first step is to finalize on your business model. As you move forward, you will get a better idea if your business is based on LLC or S corp. If you have set up in the Dallas Fort Worth area, a CPA in Dallas to advise you on the tax implications as Limited Liability Company allows opportunities for unlimited partnership across multiple countries but with S corporations, it is limited to a 100 members at maximum.
How does an LLC benefit you?
For an LLC, informational tax returns do not need to be filed as it is directly obtained from the owner’s tax filings. This simplifies the process as compared to an S corporation which demands separate filings for all members in the system. They have to hold annual shareholder’s meetings to assess the financial situation and file the statements with the state in which the company is based.
A limited liability company means can get you to have an unlimited number of partners all over the world where you can receive a share of the company profits directly. It does not depend on the amount of work that is being done by the individual members which is how an S corporation works. In this case, your tax returns will be calculated on a whole and the profit divisions are not restricted by the amount of shares in the company.
How are the profits distributed?
An LLC depends on the owner’s decision. Your contribution to the investment is irrelevant as you are in charge of deciding and coming to an agreement with your partners regarding how the profits from the company will be divided.
If you have invested in 25% of the company that you run with a partner, you can still divide profits in half if you are doing all the work and your partner agrees on the division. This is a mutually beneficial model that gives you easy tax returns unlike an S corp. The profit that is distributed in an S corporation is limited to the amount of investment made by the partner.
If you invest in 25% of the company, your profit will be 25% of the whole and it doesn’t matter how much work you do. With a CPA compiling your annual financial statement and preparing your taxes, you can get a more detailed overview on how your profits are distributed.
Considerations when paying Federal Taxes
You stand to benefit with LLC when it comes to Federal Tax considerations. An S corporation also has the same benefits, but it gets more complicated as the profits depend on investments. With no discernible difference between the two when it comes to federal tax considerations, the problems with s-corp. only extend to the complicated payout methods. Your business will stand to make more efficient decisions if you have set up as an LLC. Get a CPA to advise you on your best course of action and for a detailed brief on tax issues for LLC.