The US tax system may seem complicated and confusing. But the complexity also provides variability, which, in some cases, can allow optimizing the tax costs for the company. In this article, we will take a closer look at the tax structures for an LLC in the US and their differences to make it easier for you to choose the right one for your business.
Tax System and Business Incorporation Services in the USA
In the process of LLC incorporation, the topic of taxes in the USA is probably one of the most impressive and voluminous. This is not surprising because the US tax system has a three-tiered structure and an impressive number of regulations. Taxes must be paid at three levels:
- Regional (state level)
During business formation, it is vital to remember that a feature of the US tax system is that federal and state duties are calculated differently. They should be thought of as large domes. The entire United States is under the federal dome. Each of the states also has its own dome. An additional dome can also be on the territory of a separate county or city. For example, the federal income tax is paid by all LLC companies regardless of state since the federal level is common to all.
The government has no right to interfere with state taxation. Each state has its own tax system, different from other states, as well as different rules, requirements for LLC companies, even the forms that are filed are sometimes different.
Local-level taxes also include real estate taxes. Such taxes apply to individuals residing in a particular area.
Offshore States for LLC Formation
When contacting the best LLC professional formation services, business owners often ask which states are offshore. An important thing to understand is that offshore or completely tax-free states are a myth.
So where does this common misconception come from? It’s all about the fact that there are a number of states in the United States, namely Alaska, Florida, South Dakota, Texas, Washington, Wyoming, Nevada, and Delaware, which do not charge income tax at the state level. But even if there are no state taxes for LLC companies, there are duties at the federal or local level (remember the three-tier US tax system).
In addition, some states may have some other tax instead of income tax. For example, Delaware has this trick: they once removed the income tax at the state level, and they still don’t have it. But instead, they put in another tax (the franchise tax – $300 paid annually).
However, there are also objective advantages of business incorporation in some states that should not be ignored.
The best way would be to start choosing a state for business formation with an analysis of the activity of the company, where there will be an influx of major customers, where the office will be located.
First of all, you have to get the LLC incorporation documents to start paying taxes, and this is also a long and complicated process. You can speed it up by contacting one of the best LLC creation services online. Such LLC websites provide fast and affordable company formation services, helping businesses avoid doing a bunch of paperwork themselves. Each of these services is reliable and trustworthy, has a huge number of positive reviews, and the trust of their clients.
Limited Liability Company Formation and Taxation
A Limited Liability Company (LLC) combines the advantages of owner-level taxation (like partnerships) with the limited liability of participants (like corporations).
For an LLC, there are several taxation options to choose from:
- A partnership (if the LLC has multiple owners)
- A sole-partnership (if the LLC has only one owner)
- Corporate tax structure.
In our opinion, the simplest and most convenient form is an LLC with one owner (so-called single-member LLC, or “transparent” form). What is its convenience? Having a single owner, the company will not pay taxes. They will be paid by the individual who owns the company. The profits of an LLC company are considered to be the income of the individual, are shown on the owner’s personal tax return, and submitted on Form 1040.
If during the LLC incorporation, you have chosen the single-owner form, then the tax must be paid at the state and federal levels. The tax rate is progressive: the higher the amount of income is, the higher the tax will be. The profit received by the company is the revenue of the individual. The individual, depending on the amount of earnings, will pay tax from 10% to 37%. As a consequence, taxes are paid by those who form an LLC.
If your business has more than one owner, your company is taxed as a partnership. In that case, you have to file a Form 1065 to pay your taxes. Furthermore, each partner pays personal income tax.
An LLC company may also choose to be taxed corporately. In this case, the business is taxed as a corporation, which is 21% of the company’s profits. In addition, the owners are required to pay income duty. So, with LLC formation, business owners can choose to be taxed as Corporations, but in such cases, it is better to register a corporation immediately. However, if no activity is planned in the US, an LLC may be more beneficial than a corporation.
LLC Formation Mistakes
Once an LLC is listed in the state registry, it has to comply with both federal and state laws.
If a company is formed by a non-resident, compliance with the laws becomes subjectively even more important, although it is indisputable that everyone should follow the law.
The most common mistakes made by business owners in formation:
- Failure to separate personal spending and company spending
- Failure to give notice of changes within the company to the state
- Failure to give notice to another state about doing business in their territory
- Failure to file returns on time
- Failure to purchase insurance when the company’s business requires it, etc.
To avoid mistakes and make the LLC incorporation process easier, you can turn to the best LLC services such as LegalZoom. This LLC website will help you set up a company at a reasonable cost and will also support your business in the future. Moreover, reliable LLC creation services are Rocketlawyer and Mycompanyworks, which also offer cheap LLC formation and help owners save time and money.
Choosing the best tax structure for LLC is an individual process for each business. It all depends on the scope of the company, the state, the personal choice of the business owner or partners. We hope that this article will help you make the right choice regarding tax structure.