Our Process
Get your business up and running in the US in a matter of days.
Learn more
An LLC that is elected to be treated as a corporation combines the best of 2 business entities — LLC and Corporation.
It is an awesome step-up for existing LLCs.
In this guide, you will find out what LLC as a corporation is and how it can unlock some amazing benefits for you, as an LLC owner.
Let's start with understanding what an LLC is.
An LLC aka Limited Liability Company (LLC) is a business entity, created by state statute that gives liability protection to business owners.
It offers more protection than sole proprietorship and partnership. But it is much easier to maintain than a corporation.
By default, an LLC with a single member is treated by the IRS as a sole proprietorship and LLC with 2 or more members as a partnership.
So, if an LLC wants to be treated as a corporation, you could file a form with the IRS and request them to change your classification. Once approved, the LLC will remain as the same legal entity but will be treated as a corporation for federal tax purposes.
Now, why would anyone want an LLC to be treated as a corporation?
Glad you asked.
Turns out, there are a quite a lot of benefits.
Even if your LLC has made the election to be treated as a corporation, it is still an LLC under the hoods. Not a corporation.
The legal entity of the LLC won't change when you change the tax classification.
Members of an LLC still remain owners of the LLC that's elected as a corporation. There is no change there.
Ok, let's get to the interesting part: taxes
LLCs pay income taxes at the corporate level instead of passing on the income to LLC members.
Based on the earnings, the LLC pays income tax via Form 1120 (U.S. Corporation Income Tax Return). Corporate income tax rate is at 21% on the LLC's profits.
This way members don't have to pay LLC's income tax. They only have to worry about their personal taxes.
There are more filing formalities here as compared to regular LLCs.
Some of them are:
Since an LLC that's elected to be treated as a corporation will most certainly have their members as employees, it will have to pay employment taxes.
It is not just for member-employees. Employment taxes are to be paid for every employee in the LLC.
Social Security tax, Medicare taxes and unemployment insurance are collectively referred to as 'payroll taxes'.
Half of the amount for payroll taxes is collected from the employee's paycheck. And the other half is contributed by the LLC. The employee's share is withheld by the LLC when issuing paychecks.
FICA tax(Social Security & Medicare) - Employer portion is 6.2% for Social security and 1.45% for Medicare. LLC withholds the same amount from the employee's paycheck as well
FUTA tax - It covers unemployment insurance. Of the total amount of 6%, states usually have a 5.4% credit. The other 0.6% is paid by the employer.
LLC members who don't reside in the US don't have to pay payroll taxes. If however, you have an employee residing in the US, you will have to pay payroll taxes for that employee.
Income taxes and employment taxes are paid as estimated taxes to the IRS.
What's this estimated tax?
Estimated tax is a method of splitting up your total annual tax amount and paying them as 4 quarterly instalments.
You'll have to estimate your income ahead of time and pay them at the end of every quarter in April, June, September and January.
If your LLC is estimated to pay more than $500 income tax annually, you will have to pay them as quarterly payments.
Can't I just pay all taxes in one shot at the end of the year? Nope. IRS won't buy it.
IRS charges a penalty if you fail to pay an instalment or pay it late. So, keep this in mind.ou're just starting up or if you haven't earned any income during a quarter, you can skip an instalment entirely.
Let's talk about how you can take money out of the LLC.
An LLC that is treated as a corporation can employ its members as full time employees. This is a very common method of taking money out.
Salary is deducted as a business expense from the LLC. And it is only taxed at the owner's level, thereby avoiding double taxation.
LLC can pay out dividends to its shareholders( i.e, LLC members) on their business earnings.
This is taxed at the corporate level and also at the member's level. That is double taxation. First, corporate tax at 21%, and then members pay individual income tax on their dividends at capital gains rates, which range up to 23.8%.
Most LLC owners try to avoid this and take full time salaries from the LLC.
Whether it is a manager to manage the entire operations or other employees, you can comfortably hire employees in an LLC.
It comes with a few responsibilities though:
If a non resident-owned LLC has an employee living the US, you would have to start paying payroll taxes. If you wish to avoid having to pay payroll taxes, you can hire independent contractors or freelancers. The law asks you to pay taxes if you have a 'dependent agent' in the US. How to establish 'dependence' is a slightly complicated area. It is best to speak with a lawyer regarding this.
© 2021 StartGlobal. All rights reserved.