Understand the Role of Pass-through Taxes
It is common to wonder whether you should choose the state where you form your LLC based on taxation. For the most part, however, this will not matter since limited liability companies typically use pass-through taxation status. As such, there are not necessarily benefits to forming the LLC in a state without income tax.
To understand this point, take a few seconds to understand pass-through taxes. This refers to when the earnings of the company go right to the owner’s personal income taxes. Essentially, you end up reporting the earnings for your business like they were yours. As such, you end up paying the income tax rate of your state of residence, regardless of where you form the LLC. It also will not matter what state your company’s registered agent lives in. LLC taxation depends solely on the location you live in. That is good since it avoids double taxation, which is what many corporations face.
Types of Pass-through Taxes
To further complicate the idea of taxation that is pass-through for LLCs, there are a handful of forms of it. Pass-through is used as the default classification for LLCs. In the case of single-member limited liability companies, the businesses are disregarded entities. LLCs with multiple members are considered partnerships. In this latter case, the business files the K-1 form with the IRS. Then, the owners report their income within their own personal taxes. This K-1 helps ensure that all owners remain honest regarding their earnings, but it does not involve the company paying any taxes.
Or you can choose to use S-Corp or Subchapter-S taxation with your limited liability company. This is another classification for pass-throughs that is not necessarily better or worse. You will need to discuss which type of pass-through classification makes the most sense for you based on a conversation with your lawyer. To further complicate matters, the best option for you may change every year.
You Can Change Your Classification
If you and your accountant decide that your classification is not ideal for your situation, you do have a course of action to take. The IRS will automatically assign your default classification at the time of your EIN application. To change the status to S-Corp classification for taxes, fill out form 2553. Any other situation where you want to change classification requires form 8832.
Keep in mind that after you get your EIN, you will only have a period of 75 days to submit those forms. If you submit them within that deadline, they will apply retroactively. Any changes after this period do not apply retroactively. Additionally, after those 75 days, you can only change classifications one time every five years.
For clarification regarding Florida LLC taxes, your best option is to contact your accountant.