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Does an LLC business pay the new business tax rates? If not…

Does an LLC business pay...
Does an LLC business pay the new business tax rates? If not what business types could I form to pay the new rates and not my personal tax rate? How is the 20% deduction calculated?
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Answered in 53 minutes by:
3/10/2018
Attorney Wendy
Attorney Wendy, Attorney
Category: Business Law
Satisfied Customers: 1,198
Experience: Member at Keefer & Keefer LLC
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Hello. My name is ***** ***** I am an attorney. I am currently working on a response to your question and should have that to you shortly.

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This issue requires a little explanation and I will try to make it as simple as taxes can be made. There are several types of business entities that exist in Ohio - corporation, partnership, LLC, for example. In each case there is potentially different tax treatment. Corporations are taxed on their profits at corporate rates. Then shareholders of the corporation receive dividends and are taxed on those funds on their personal returns as dividends. If it is a small business (perhaps just you) and you were a corporation, the entity would pay taxes first and then you would pay taxes on anything you received from the corporation either as income or dividends, depending on how you disbursed the funds to yourself. As a small corporation you can opt to make what is known as the S-Election; this is common with very small corporations that meet the requirements to qualify as S-Corporations. With an S-Corporation, you have created what is known as a pass through entity, meaning the corporation itself pays no income taxes, but each of the shareholders is attributed the company's profit or loss for the year as income to report on their own personal tax returns. Partnerships are similar to S-Corporations in that a partnership tax return is filed but all the profits or loss flow to the individual partners and are reported on their personal tax returns. An LLC is not recognized as a taxable entity by the IRS so it also is a pass through entity and each member of an LLC is attributed their portion of profits and losses to report on their personal income tax returns. This same pass through scenario occurs with sole proprietorships and LLP (limited liability partnerships). The good news is that the new 20% deduction applies to most, if not all, of these pass through entities and even if you own your own business as a sole proprietor (though there may be other reasons to organize your business into an LLC or other entity). The only entities it does not apply to are traditional corporations, whose top tax rate has been capped under the new law at 21%. The reason most smaller businesses opt for and will likely continue to opt for - especially with the pass through business 20% deduction - pass through entities is that their business' profits are not taxed twice. With a corporation, that entity pays taxes and then the shareholders pay taxes again on the part of the companies funds that are paid out as dividends. This may be more than you wanted to know, but I hope it helps. The 20% pass through business deduction goes into effect for your 2018 (not 2017 unfortunately) taxes. In terms of the other impacts of organizing as an LLC or other business entity your accountant can provide good insight on the financial impacts.

If you need further help, please reply to this email. If I answered your question and provided excellent service, I would greatly appreciate your 5 star rating at this time.

Please note: This information is for educational purposes only and is not legal advice. No course of action is being proposed and no attorney-client relationship or privilege has been formed as a result of this conversation.

Attorney Wendy
Attorney Wendy, Attorney
Category: Business Law
Satisfied Customers: 1,198
Experience: Member at Keefer & Keefer LLC
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DISCLAIMER: Answers from Experts on JustAnswer are not substitutes for the advice of an attorney. JustAnswer is a public forum and questions and responses are not private or confidential or protected by the attorney-client privilege. The Expert above is not your attorney, and the response above is not legal advice. You should not read this response to propose specific action or address specific circumstances, but only to give you a sense of general principles of law that might affect the situation you describe. Application of these general principles to particular circumstances must be done by a lawyer who has spoken with you in confidence, learned all relevant information, and explored various options. Before acting on these general principles, you should hire a lawyer licensed to practice law in the jurisdiction to which your question pertains.

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