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How Limited Liability Company Taxes Work For Marketers

Tax Planning, Tax Structure, Tax Strategist, LLC, Limited Liability Company, Tax Elections

It’s no secret that the de facto choice for your marketing agency’s legal entity is a limited liability company (“LLC”).

A limited liability company is the preferred legal entity of choice for marketers for the primary benefits:

  • Flexible Capital Structure
  • Limited Liability Protection

Flexible Capital Structure

With an LLC, you can create an unlimited combination of voting and economic arrangements you want. You can have multiple classes of units that offer varying priority returns on profits and capital in the business.

Limited Liability Protection

A limited liability company grants limited liability protection to all of its members. Tread carefully here as you can easily lose this protection by piercing the corporate veil.

Given all of the benefits, it’s hard to see why anyone wouldn’t choose an LLC for their marketing practice or agency in this day and age.

LLC Tax Classifications

Choosing an LLC for your legal structure is easy, but classifying it for taxes is hard because of its flexible nature. You have two default classifications and two elective classifications available. Let’s walk through the options:

Classification 1: Sole-proprietor (Single Member LLC)

If you own 100% of the LLC used for your marketing practice, the Tax Code doesn’t recognize your LLC for income taxes. It’s a disregarded entity and your marketing income and deductions are recognized on your individual tax return assuming you’re the sole owner. You would:

  • Report marketing income and deductions on Schedule C of Form 1040
  • Pay individual taxes and self-employment taxes on marketing taxable income
  • Not pay taxes on distributions out of your LLC bank account
  • Eligible for the super deduction

Your LLC is still regarded for every other purpose, including employment taxes, so keep issuing 1099s and W-2s to your agency’s contractors and employees under your LLC. Be sure to classify yourself as a disregarded entity on the W-9 you provide to your clients.

Classification 2: Partnership (Multiple Member LLC)

If your practice or agency has multiple members, like a joint venture, then the Tax Code recognizes your LLC as a federal tax partnership – a regarded entity. A partnership must have more than one owner, otherwise, you don’t have a partnership.

You and your partner(s) would file a separate tax return for your marketing agency, but your LLC wouldn’t pay any federal income taxes. Partnerships are pass-through entities which means that the members pay income taxes on their share of the LLC’s income. The members will:

  • Report marketing income and deductions on Schedule K of Form 1065
  • Report each member’s share of income and deductions on Schedule K-1 based on their economic share
  • Members pay individual taxes and self-employment taxes on their share of income and deductions reported on Schedule K-1
  • Not pay taxes on distributions out of your LLC bank account (with many exceptions)
  • Eligible for the super deduction

Partnerships are extremely complicated in the tax world because of all of the possible economic arrangements between parties. I’ve seen too many disagreements where members think they’re paying more than their fair share of taxes because of inadequate or erroneous tax planning.

It’s best to retain an experienced Tax Strategist who knows how to properly maintain each member’s capital account from inception to end.

Classification 3: Corporation

You can elect to classify your LLC as a corporation on Form 8832. A corporation is a regarded entity that pays its own income taxes. Your agency would:

  • Report marketing income and deductions on Form 1120
  • The LLC pays income taxes unless it files an “S” election
  • The officer pays income and payroll taxes on a reasonable salary paid out of the LLC
  • Shareholders pay a tax on dividends out of corporate earnings and profits (with many exceptions)
  • NOT eligible for the super deduction

Corporations are subject to double taxation in two ways: the corporation pays taxes on profits, and the shareholders pay taxes on dividends. You also have to pay shareholders “reasonable compensation” for any officer, director, or employee roles they assume in the business.

Classification 4: S-Corporation

You can elect to classify your LLC as a corporation, and then elect “S” status for your corporation.

S-corporations are pass-through entities that share similarities with partnerships and corporations. The shareholders would:

  • Report marketing income and deductions on Schedule K of Form 1120S
  • Report each shareholder’s share of income and deductions on Schedule K-1 based on stock ownership
  • Shareholders pay individual taxes on their share of income and deductions reported on Schedule K-1
  • The officer pays income and payroll taxes on a reasonable salary paid out of the LLC
  • Shareholders do not pay taxes on distributions out of your LLC bank account (of course exceptions apply)
  • Eligible for the super deduction

S-corporations are attractive for tax savings because of the single layer of tax, zero self-employment tax, and deductible benefits for shareholders. The Code requires the LLC to have only a single class of stock. They also have strict ownership requirements that could terminate your “S” status if you don’t follow them. They’re generally harder to maintain and upkeep – a task you would want to outsource to your local Tax Strategist.

How Should I Classify My LLC?

As with all things in the tax world, it depends!

  • How many partners do you have? Do you plan on bringing on anyone new?
  • What’s your annual net income? What are your revenue growth projections for the next 5 years?
  • How much profit are you reinvesting back into your practice? How much are you distributing for personal expenses?
  • Where is your agency doing business? Other states? Foreign countries?

A great Tax Strategist will build you a comprehensive Strategic Tax Plan for your agency that selects the most appropriate classification for you.

If you need help with tax planning, check out the Ultimate Guide to Tax Planning For Your Marketing Agency.

Don’t have a Tax Strategist to save you the big bucks? Get to know one on a 15-minute chat!

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