If you are preparing to launch a new company, you will have many decisions to make. These decisions include what type of management and operational structure you would like and how you want your new entity to be taxed. The choices you make may have a direct impact on your ultimate profitability and, therefore, success.
LLCs may be taxed multiple ways
As explained by Forbes, many small business owners elect to establish their new companies as an LLC instead of a corporation. One reason that the LLC structure has grown to become so popular is because it generally provides a simpler means of managing the business with fewer requirements than does a corporation. An LLC, however, may be taxed like an S corporation or it may be taxed like a sole proprietorship.
S corporation versus sole proprietorship taxation
If taxed like an S corporation, the LLC owner or member pays income taxes on their own earnings and is not required to make contributions for Medicare or Social Security. If taxed like a sole proprietorship, the LLC owner or member makes Medicare and Social Security contributions as well as paying income tax. Many factors will contribute to determining which taxation model is most advantageous for a given business. The business strategy and future plans for expansion, mergers, acquisitions and more should all be evaluated when making this decision.
If you would like to learn more about how to set up your new business from both a management structure and taxation designation perspective, please feel free to visit the LLC and corporation page of our North Carolina business law website.