A lot of people are confused about what they’re getting into when they create their company as an LLC. Most choose an LLC because that’s what they’ve heard is best. And while LLCs have their benefits, they aren’t the end-all, be-all—but that’s for another article.
How the IRS Treats LLCs
When you form an LLC with the State of Florida (or any other state), the IRS doesn’t automatically assign it a tax classification. Instead, they ask:
"How do you want us to treat you for tax purposes?"
The IRS doesn’t have a separate tax category for LLCs, so when you create one, you must choose from the following:
Corporation (C corp)
S corporation (S corp)
Partnership (if there is more than one owner)
Disregarded entity (if there is only one owner)
If you don’t explicitly tell the IRS how you want to be treated, they’ll choose for you:
Single-owner LLCs are automatically classified as disregarded entities.
Multi-owner LLCs are automatically classified as partnerships.
An LLC taxed as an S Corp can reduce your self-employment tax burden. Instead of paying Social Security and Medicare tax on 100% of your net income, you can pay yourself a reasonable salary and take the rest as distributions—saving on payroll taxes.
What is a Disregarded Entity?
If your LLC is classified as a disregarded entity, it means the IRS will not recognize your business as a separate tax-paying entity. Instead, you’ll report all of your business income and expenses directly on Schedule C of your personal tax return—just as if the business didn’t exist.
Let's say for example, you're a solopreneur running an e-commerce store, a disregarded entity might be fine at first, but as your business grows, switching to an S Corp could save you thousands in self-employment taxes. If you're planning to attract investors, a C Corp might be the best move.
The benefit? No separate business tax return is required.
The downside? If your business is profitable, all net income is subject to both income tax and self-employment tax (Social Security & Medicare), adding an extra 12% tax burden.
LLC Formation is Just the First Step
Creating an LLC is just step one. Deciding how your business will be taxed is just as important—if you don’t choose, the IRS will do it for you.
Not sure which structure is right for you? At SJH CPA, we help small business owners navigate tax elections, ensuring they maximize savings and avoid costly mistakes! Book an appointment today and let us make your business, our business as we help you gain clarity and peace of mind.
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