Will operating as an LLC save my business on taxes?
As a business owner, you might have heard some rumors that one way to lower your tax bill is to form a Limited Liability Company (LLC). While there are many ways to lower your taxes, there are rarely simple sweeping statements that apply to every situation, and this is no exception. To the simple question “Will forming an LLC ALWAYS lower your business’s taxes?” the answer is no. To the question “CAN forming an LLC lower your taxes?” the answer is yes, but it depends on your situation.
This is a multifaceted question that influences different parts of your business, and whether or not it will save you money on taxes shouldn’t be the only aspect considered. There will be effects on ownership rights, effects at the state tax level, effects at the federal income tax level, potentially effects on social security taxes, as well as asset protection. Will the additional benefits of operating as an LLC outweigh the additional costs? The only way to know is by considering a series of questions. Here are some of them.
What state(s) to you operate in?
Do you have employees?
What sector or industry do you operate in?
How many owners are there?
If there is more than one owner do the various owners have equal rights and responsibilities?
What are the growth plans for the company?
How will the growth be funded?
What is the net income of the company?
What mix of assets does the company own?
While a list of questions might not be the easiest way to answer a question. The best way to resolve the question is to consult with a qualified professional who will ask you these questions and should ask even more questions based on where the answers lead.
There are real tax savings available by operating your business as an LLC. However, there is no sense in using an LLC, if it is not the correct entity type for your business at this stage.