When businesses are formed, particularly single member limited liability companies (LLCs), a thoughtful tax assessment needs to be made to determine how the company should be designated for tax purposes. Depending on the designation, a business owner will be taxed very differently based upon the flow of funds each year.
An LLC can be taxed on various levels with the designations one can elect. For instance, an LLC can be considered a ?disregarded entity?, and is treated as a sole proprietorship for income tax purposes. Alternatively, a single member LLC can classify itself as an S-Corporation for tax purposes, which may result in a tax benefit to the owner based upon the amount of income paid each year.
Every instance requires a thoughtful view of the company, its financials, and the income and dividends the company will pay each year. Once formed, an owner should take a look at its books on an annual basis to ensure that the designation is best suited for the current state of the organization.