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Arlene Rheinfelder, EA, CP AZCLDP

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Melissa Hill, AZCLDP

I love the challenge of finding a way to help each person's unique situation. It is never the same because each person is different with their own needs and wants.

Do I need an LLC?

When your taxes are prepared, your tax professional may suggest that you can save on income taxes by forming a corporation or LLC, which stands for limited liability company. While the two types of businesses have some similarities, there are also some marked differences.

A corporation issues shares to shareholders, and is required to file an annual report with the corporation commission, pay an annual fee, and pay a penalty fee if the annual report is filed late. In many circumstances, corporations are more difficult to administer and more costly to form.

There are generally two Internal Revenue Code classes of corporations: c-corporations and s-corporations. A c-corporation is what might be considered a traditional corporation, whose shares are traded on the stock exchange, or it can be a small corporation with one shareholder. Its profits are taxed once as a corporation, then, any dividends (aka profits) paid to shareholders are taxed as income to the shareholder. So in effect, the profits are taxed twice.

An s-corporation is not taxed separately on its profits. The profits are taxed on the shareholder’s income tax return. Although an s-corporation must file an income tax return, the return is for informational purposes. This results in the profits being taxed once.

An LLC has one or more members which own a percentage of the company. It has no annual corporation commission filing requirements, which eliminates the potential for late filing penalties. An LLC may choose to be taxed as a partnership, c-corporation, s-corporation, or in some instances as a sole proprietorship.

If your tax professional is advising you to set up a corporation, and you do not want the extra burden and expense of filing annual reports, ask your tax professional if can achieve the same goal by forming an LLC and electing s-corporation status.

Ask your tax professional the exact purpose for forming the business. If the intention is to save on self-employment taxes, then be prepared to pay yourself wages as an employee. Once you begin paying yourself wages, your business will need to be registered with the state to pay unemployment and income taxes. You will also need to pay federal Medicare, Social Security, unemployment, and income taxes.

Wait a minute, wasn’t the idea to save on taxes? Yes, depending on your circumstances, forming a corporation or LLC may result in paying less total income tax. By determining your tax professional’s goal, you can decide whether a corporation or an LLC will best accomplish that goal.

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Please Note: We are NOT attorneys and do NOT provide legal advice. Your information is confidential, but we do not have attorney-client privilege. If you need legal advice, you will be referred to an attorney.

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