If you've taken the step to change the entity of your small business from a sole proprietorship to an LLC, or are reviewing your options, it's a good idea to compare the tax implications of the decision. Managing your taxes effectively will be conducive to your business growth; not only can you accurately assess your profits and revenue, but you can make the most of your investments by allocating the right amounts of taxes each year and avoiding excess payments. This is especially important for the critical times that your business needs cash on hand.

An LLC is a Limited Liability Company, giving you, the business owner, freedom of personal liability from most (not all) damages or debts incurred by the business. Still, there are a few distinct tax benefits and conditions to consider before taking the plunge:

1. The IRS considers the LLC a ‘pass-through entity' meaning that any income and revenue will be reported on the business owner's personal, individual tax return. In most cases, LLC members need to estimate their quarterly tax payments and report them to the IRS

2. Sole owners of an LLC are reviewed as sole proprietors in the eyes of the IRS; this means all profits and losses are still submitted on a Schedule C along with the 1040.

3. Co-owned LLCs are reviewed as partnerships in the eyes of the IRS; each business owner pays taxes on their portion o the profits on their personal income tax retursn along with a Schedule E. If an operating agreement is drafted, this will indicate the percentage of the shared revenue that is divided amongst business owners.

4. Special allocations will need to be outlined in detail. These are used when the LLC's member's contributions are not proportionate to the split of profits. For example, one owner may be earning only 25% of the profits although they are contributing to 50% of business operations. This will all be outlined in the operating agreement, and can serve as one form of proof.

5. Co-owned LLCs must file Form 1065, an informational return that the IRS checks to make sure all income is reported correctly.

6. Some states impose fees on an LLC that are not related to income or profit. These may include franchise taxes, registration fees, and renewal fees. You can find out information on this with your state's department of revenue.

7. LLC members are considered self-employed business owners, not employees of the LLC. This means they are responsible for estimating the amount of tax they may owe, and reporting this accurately.

8. All LLC members must submit a Schedule K-1 in addition to the 1040 and Schedule E. This breaks down member profit shares.

9. LLC owners must pay self-employment taxes since contributions to Social Security and Medicare are not withheld. This is reported on the Schedule SE, and equates to 15.3% of the first $97,500 of income. It's important to remember that self-employment taxes are double than regular employees, since tax is not matched by the employer

It's still important to remember that most of the income that is used as part of business operations cannot be taxed, but deducted as a business expense. This will have a significant impact on the amount of taxes owed, and it's important that you learn about the many deductions available for your small business. Many small business owners overlook the different avenues and categories that are available for deducting expenses. If you are setting aside a significant amount or retained earnings each year, you may have a better taxation rate by choosing corporate taxation. These rates are lower than individual income tax rates, but require a certain amount of income and profits each year.