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Pass-Through Taxation of an LLC

One of the advantages for small businesses of forming a limited liability company or LLC is that it automatically qualifies for pass-through taxation. This is similar to a partnership, where taxes are essentially “passed-through” the LLC to the individual members of the LLC. Each member then declares their share in the LLC’s annual profits and pays the taxes accordingly, less deductions of course.

The reason that pass-through taxation is desirable for most small businesses is because there is no double taxation such as in a corporate structure, which means the members of the LLC get to keep more profits. And just as profits are shared and taxed accordingly, members also get to offset some losses the LLC sustain in a given year on their other income.

This method of taxation can be beneficial, but it is not at all a simple process. Like a partnership, the LLC files a tax return although it has no tax burden. It is mostly informational on the gains and losses of the LLC, which are then passed on to members’ personal returns. Because the nature of pass-through taxation involves not only LLC activities but takes into account personal income, deductions and exemptions, it can make an inexperienced person’s head spin.

Another benefit of a limited liability company is that investors aren’t held liable when the company is sued. This is a good way to get people to invest in your company without the risk of future lawsuits. LLC’s are normally seen in fields such as construction, oil and other risky businesses.

In most cases, LLC taxation should be handled by a tax lawyer who has extensive experience in handling LLC tax planning that will maximize the benefits of pass-through taxation. Consult with a competent business law firm in your area to ensure that the requirements and rules of the state where you are doing business are fulfilled.

2 Responses to “Pass-Through Taxation of an LLC”

  1. Law is always so puzzling to me, thanks for making sense of it.

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