Should My LLC Be a Pass-Through Entity?

You have the choice to decide whether you want your Limited Liability Company (LLC) to be a pass-through or taxed entity when you form it. The correct corporate structure must be chosen because it has a big impact on your company’s tax duties and liabilities. The benefits and drawbacks of choosing a pass-through entity for your LLC will be covered in this article.

A business structure known as a pass-through entity doesn’t pay taxes on its income. All earnings and losses are instead “passed through” to the personal tax returns of the firm owners, who then pay income taxes at their individual tax rates. LLCs, partnerships, and sole proprietorships are a few examples of pass-through businesses.

An LLC is a type of corporate structure that has the option to pick its tax treatment, not a tax categorization. Single-member LLCs are automatically taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. But LLCs have the option to be taxed as S Corporations, another type of pass-through organization. Is an EIN Required for a Pass-Through Entity?

Yes, an Employer Identification Number (EIN) is still required for an LLC that is a pass-through organization. An EIN is necessary for tax-related activities, like opening a business bank account, filing taxes, and acquiring business licenses, even if you do not have any workers.

Choosing a pass-through entity for your LLC has a number of drawbacks, not the least of which is that you are personally liable for all debts and liabilities incurred by the company. This means that creditors may seize your personal assets to cover the debt if the company is unable to meet its obligations. Additionally, compared to taxed corporations like C Corporations, pass-through entities do not have the same level of liability protection.

The individual tax bracket of the business owner determines the pass-through income tax rate. The tax rate on pass-through income is the same as the tax rate on ordinary income, which can be between 10% and 37%. However, a new deduction for pass-through organizations was added by the Tax Cuts and Jobs Act of 2017, enabling business owners to deduct up to 20% of eligible business income.

Finally, selecting a pass-through organization for your LLC might have both benefits and drawbacks. It exposes you to personal liability for corporate debts and liabilities, even while it can simplify your business’s tax duties and offer tax benefits. As a result, in order to choose the best entity structure for your company, you must speak with a tax expert or legal counsel.