What Tax Structure to Consider When Forming an LLC for Online Business?

Posted by chirag on October 2nd, 2023

There are various business entities. However, for an online business, LLC is the most ideal. But there are various types of LLCs to choose from and you need to decide on it when you submit an online LLC application. What’s great about LLCs is that your personal assets are protected. It makes it an ideal structure even if you are a one-person shop.

Deciding on Tax Structure to Submit an Online LLC Application
Forming an LLC for your online business is a strategic move that combines liability protection with operational flexibility. But what is the right structure for your LLC? Here are your options.

Default Tax Status
When you form an LLC, it is vital to know the default tax status assigned by the IRS. By default, single-member LLCs are treated as disregarded entities for tax purposes. What it means is that the income and expenses of your LLC are reported on the owner’s personal tax return, meaning Form 1040. If your LLCs have various members, then you need a multi-member LLC. It is typically treated as a partnership. Each member of the business reports his/her share of profits and losses on his/her individual tax returns.

Electing S Corporation Taxation
If your online business is generating significant profits, you may consider electing S corporation taxation. This option allows your business to be tied similarly to a corporation but you will still maintain the benefits of limited liability. With S Corp taxation, your LLC profits and losses pass through to the owners’ individual tax returns. You and the other members will receive a portion of your income as a salary subject to self-employment taxes.

C-Corporation Taxation
It is less common for small online businesses. However, this taxation is another option. C Corps are separate legal entities that pay corporate income taxes on their profits. Do you anticipate reinvesting a significant portion of your online business’s profits back into the company? Or plan to attract venture capital or institutional funding? If you do, then C Corp taxation might be more suitable.

Factors to Consider
When deciding on the best tax structure for your online business, you need to consider the following:

Business Goals: Consider your short-term and long-term business goals. Are you aiming for rapid growth, significant investment, or steady profitability?
Profit projections: Evaluate your protected profits and losses. Different tax structures have varying implications for reporting income and minimizing tax liability.
Self-employment taxes: These taxes can be substantial for LLC owners, particularly those subject to Social Security and Medicare taxes. Choosing an S Corp or C Corp structure can affect the amount of self-employment tax you pay.
Ownership and Control: The number of members and their roles in the business can influence the tax structure decision. S Corps have limitations on the number and types of shareholders.
Administrative Requirements: Consider the admin complexity of different tax structures. S Corps and C Corps typically have more reporting and compliance requirements than default LLC taxation.

Seek Professional Guidance
Choosing the right structure for your online business is a complex decision that needs to be carefully considered. If you need help with your online LLC application, please give us a call.