General Partnership & LLC Tax Considerations
Selecting the appropriate type of an organizational entity for your business entails that you carefully balance asset protection, cost-effectiveness, simplicity and tax ramifications. Compared to Partnerships the LLC will be the most efficient and flexible choice for purposes of tax considerations.
When comparing a Partnership and an LLC, significant differences arise in state fees, operation under state laws and taxation by federal and state governments. All these factors should get considered when choosing which organizational form is suitable.
When making the final decision on the entity form, you should consider the following tax issues:
- Self-employment taxes
- Income tax liability-both state and federal
- Fringe benefits and
- Retirement plans.
Partnerships have specific attributes defined by statute. In a general partnership, all partners share equally the rights and responsibilities of the business. Each partner is also equally answerable for all debts and obligations incurred by the company.
In Partnerships, a written agreement defines the distribution of profits and losses and other issues pertaining to the partnership. Income and expenses of the business get filled on federal and state “information” tax returns. Partners get taxed according to their respective shares of the business profits, at their individual income tax rates.
Limited Partnerships: Partners share liability only up to their investment amount injected into the business. A limited partnership should get incorporated in compliance with statutory rules, including tax requirements and securities laws. Owing to their complex nature, LLP’s should only get registered with the advice of competent professionals. At Quick Pro consulting services, we can guide you on the best form of incorporating your business.
Limited Liability Partnerships: Partners enjoy exemption of their personal assets from liabilities incurred by the partnerships torts or contracts affairs. LLP’s file annual reports with the Secretary of State. There is a one-year grace for retroactive reinstatement after an LLP’s revocation for failure to file an annual report.
Partnership & LLC Income Tax considerations in forming a Limited Liability Company
An LLC entity combines the operational flexibilities and tax advantages of a general partnership and covers it with a limited liability protection; associated with corporations and limited partnerships. An LLC enjoys far greater operational flexibility than a limited partnership.
LLC get taxed as a sole proprietorship for a single owner LLC or as a partnership, for multiple partner companies. When you incorporate, the most primary feature is the tax benefits. Deducting necessary business expenses in various categories provide some relief from the overall tax bite levied on your business revenue. LLC’s and Partnerships vary in deductions in terms of health care, employee benefit plans and contributions to retirement, for example; LLC members pay income tax on such employee contributions.
LLC’s profits and losses get passed from the business to its owners who in turn report the same in their personal tax return. An LLC can file for different taxation classifications by preparing the IRS form no. 8832.An LLC can also choose the option of being taxed as a corporation. If an LLC chooses the Corporation option; it can elect what is known as a subchapter S as well and get taxed as an S Corporation.
Choosing corporate taxation option for an LLC
C Corporations get taxed on the remaining profits at the end of the business year. The tax rate imposed is that of Corporations, which is lower than the one fixed for individuals. It helps in asset protection. Legal provisions for LLC’s protect the company’s assets in the event a member gets sued.
Another factor of corporations is members can choose a fiscal year to incorporate which can later get changed with some paperwork. A particular month gets chosen, and the company’s tax year gets counted as the last day of the stated month. The option paves way for additional flexibility, so that a company can shift its personal income from one year to the next.
For S corporations, a calendar year exists, making it impossible for such shifting. LLC’s which elect for taxation as a corporation can choose a fiscal year end date to increase financial flexibility in regard to taxation. LLC’s also enjoy the benefits of writing off 100% of medical expenses for their employees and their dependents.
Incorporating and Tax Advantages
The main advantage of LLC’s is they enjoy tax at different levels, they can be taxed as an entity, sole proprietorships, partnerships and as corporations and S corporations. If taxation is your biggest factor, then an LLC may be the best for your business. Incorporating for tax purposes unfolds a myriad of scenarios, choosing what is right is important, here are some basic guidelines:
- Pass-through Taxation: Where a company owner is a single person or an entity, it is granted a pass through taxation.It should be considered in the event of passive income, such as stocks, holding accounts, mutual funds and bonds. Real estate is another example where employee plans and business deductions are not crucial in planning tax scenarios before incorporating. All LLC’s and partnerships get taxed this way.
- Corporate Taxation: Recommended for active businesses who spend most of their income and where employee contributions and health plans are primary considerations. Asset protection increases if all the company’s profits do not appear on financial statements or personal tax returns.
- S Corporation Taxation: Suitable for active businesses.Shareholders can reduce tax responsibility on their income by 15.3%.
For Partnerships & LLC income tax considerations, partnerships tax treatment is more advantageous than for corporations.The fact is mainly because partnership profits get treated like the earnings of its partners.Therefore, no separate tax gets imposed on the business entity.While, in contrast, a corporation’s profits get taxed at the entity level; meaning that any dividends distributable to shareholders are also subject to taxation.Thus, distributed earnings end up being taxed twice, while the profits of LLC’s and Partnerships get taxed only once.
Quick Pro Consulting, Income Tax Services
Quick Pro company, deals with Incorporation and taxation complexities. Our tax preparing involves Professionals registered with the IRS.We will offer you advice and guidance on the suitable incorporation option for your business and advise and prepare for you all the required tax fees and returns for your company.
Quick-Pro Consulting services will help you to decide which entity structure suits your business. Protect your investment by letting Quick pro Professionals handle all the critical questions for you. At Quick pro Consulting, our professionals will ensure your business obtains proper registration and saves you unpleasant penalties and tax agency confrontations.