When an LLC is classified as a corporation, it must pay the state's corporate tax rate. In Indiana, this rate is 4.9 percent, which is significantly lower than other states' rates. Unlike many states, Indiana does not assess franchise or privilege taxes. However, certain financial institutions are subject to specific income tax rates.
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S-Corporation
A business may be too small to generate taxable income with an LLC. An S-Corporation classification offers greater tax flexibility. However, it has some drawbacks. In some cases, the business will not be able to produce enough residual income to make the S-Corporation tax deduction worthwhile.
One advantage of the S-Corporation classification of an LLC is that it saves on self-employment taxes. When an LLC is taxed as a sole proprietorship or partnership, its owners are considered self-employed, and are subject to Social Security and Medicare taxes. On the other hand, an S-Corporation can elect to be taxed as a corporation if the owners are also employees. In this case, the owners are still obligated to pay a reasonable salary to employees, but they do not pay self-employment taxes on the business's profits.
An S-Corporation is recognized as a tax-exempt entity by the state of Indiana. The Indiana S-Corporation does not pay corporate income tax, though individual shareholders will owe tax on their share of the company's income. Moreover, Indiana does not impose an estate tax.
One disadvantage of an S-Corporation is its restrictions on who can be shareholders. An S-Corporation cannot issue preferred stock, profits interests, or stock with special allocations. In addition, it cannot receive any investment from foreign investors. As a result, it has limited equity financing flexibility and limits the company's ability to raise capital.
Pass-Through Entity
Indiana has several rules regarding the taxation of LLCs. First, it is important to understand that LLCs are not corporations and therefore, you do not need to file a separate state tax identification number with the Indiana Department of Revenue. In addition, LLCs do not file Franchise Tax Reports. However, they do have to file an Annual Report with the Indiana Secretary of State.
Another important factor in LLC taxation is the structure. LLCs are usually classified as a pass-through entity. A pass-through entity is one that has members who pay taxes separately from the business. However, a C-corporation will not avoid paying taxes on its income because its dividends are taxed twice - at the shareholder and corporate level.
Moreover, the IRS requires that all LLCs obtain an EIN (Employer Identification Number), which is a nine-digit number assigned by the IRS. A valid EIN is necessary if your Indiana LLC hires employees. In addition, EINs are required for foreign-based LLCs as well.
Having an LLC is not difficult in Indiana. It requires fewer documents, which is a big benefit for small businesses. In addition to being easy to establish, an LLC is also tax-efficient. By using a pass-through structure, an LLC can avoid paying corporate income taxes - meaning you'll pay less tax overall.
Series LLC
If you own more than one type of business, you may wish to consider setting up a Series LLC. It is a relatively simple structure, requiring only one state registration, operating agreement, and annual report. These documents are not complex, just stating the name of the Series, the managing party, and the members of that Series. The master Operating Agreement will handle the management of the Series' subsidiary LLCs.
Series LLCs are taxed the same way as a single company, but each Series is separate and has its own assets, conducts its own business, and incurs liability. Indiana's new laws make this distinction clear. It's important to hire an attorney who understands the intricacies of series LLCs before you set up yours.
If you're a new business owner, a Series LLC may be the best option for you. Indiana has not yet fully regulated this business structure and it was only introduced on January 1, 2017. Although it may become a popular option for some people, it's not a good choice for most business owners.
If you'd like to form a series LLC in Indiana, you can choose to use a registered agent service. Northwest Registered Agent can help you do this. In addition, it provides industry-leading customer support. To form your series LLC in Indiana, contact Northwest Registered Agent.
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