Do LLCs Pay More Taxes than Sole Proprietorship?Differences You Need to Know Between the Two!
When it comes to tax related questions, we often get asked “Do LLCs Pay more Taxes than Sole Proprietorships?”
Sole Proprietorships are the simplest and least expensive business types.
The main characteristic of a sole proprietorship is that there is no legal separation between the individual (business owner) and the business itself.
This means that the business owner is personally liable for any of the businesses debts.
An LLC on the other hand, is a business structure designed to protect business owners from being personally liable for the company’s debts or other liabilities.
While an LLC is more expensive to form and requires more initial paperwork (because an LLC is recognized as a legally separate entity), it provides the owner with liability protection from any of the business’s debts – something a Sole Proprietorship does not offer.
LLCs and Sole Proprietorships are different when it comes to liability protection.
Sole Proprietorships do not provide liability protection to its owner while LLCs provide unlimited liability protection.
Although LLCs and Sole Proprietorships are different in terms of liability protection, they are actually quite similar when it comes to taxes.
Do LLCs Pay More Taxes than Sole Proprietorship?
Unless a business owner elects to pay their LLC taxes as a corporation, the answer is NO.
LLCs do not pay more taxes than Sole Proprietorships.
Both an LLC and a Sole Proprietorship qualify for pass-through taxation.
Pass through taxation basically means that any profits and losses from the LLC or Sole Proprietorship are “passed through” to the business owner and taxed as personal income.
This benefits the business owner because they are not required to pay both corporate and personal taxes on their earnings, they are only taxed once.
Multi-member LLCs are treated like partnerships for tax purposes.
In this scenario, the LLC profits are split up amongst the LLC members and each member pays taxes of their share of the profits on their personal income tax returns.
Thus, multi-member LLC members still qualify for the pass-through taxation benefits of only being taxed once.
As long as an LLC doesn’t elect corporate taxation, it has the same exact tax structure as a sole-proprietorship.
In other words, LLCs do not pay more taxes than Sole Proprietorships.
Because there is not difference in the tax structure, many business owners choose to set their business up as a Limited Liability Company so that they can take advantage of the liability protection that comes with it being a separate legal entity.
Learn more about LLCs and how they can offer the protection you need for your business and personal assets.
You can also learn more about Sole Proprietorships in our article here.