If you are starting a business in the state of Tennessee, you generally have the right to organize it as a limited liability company, or LLC. One of the potential benefits of creating an LLC is the ability to select how you would like the entity to be taxed. In most cases, this type of company can choose to be taxed as a disregarded entity, a partnership or a corporation.
Why would you want your company to be a disregarded entity?
If you are the only member of your LLC, it may be easiest to treat your company as a sole proprietor for tax purposes. In such a scenario, you would file your income tax return by submitting a Schedule C form. It’s important to note that your firm will still be seen as a separate entity for business and excise tax purposes. Furthermore, you can still use the LLC structure to protect personal assets from being liquidated after a lawsuit or if the company ceases operations.
Why would you want your company to be taxed as a partnership?
Like a sole proprietorship, a partnership is generally seen as a pass-through entity. This means that your share of a company’s profits or losses flows through to your personal tax return. An LLC that has two members will receive this tax treatment by default.
Why would you want your company to be taxed like a corporation?
Using the S corporation structure may make it possible to save money on employment taxes. This is because you can classify a portion of your earnings as an owner distribution, which is taxed as ordinary income instead of wage income. However, since the IRS has the power to reclassify your income, it may be a good idea to learn more about this topic during the business planning and formation process.
Choosing the right business structure may help your company reduce its tax burden now and in the future. Understanding how that structure works might help reduce the chances of receiving a potentially costly audit.