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Start an LLC in Georgia: Tax Benefits

Start an LLC

Tax benefits are of interest to LLC owners, both local and international

Forming an LLC (limited liability company) in Georgia offers business owners limitation of liability but with reduced complexity compared to a corporation. However, people who want to start a Georgia LLC always want to know if there are any tax benefits attached to that business structure. Like any other business, the LLC must collect and pay sales tax if it sells taxable goods and services. If it has employees, it must withhold employee income taxes and pay these to the government, and also pay state unemployment insurance (UI) taxes to the Department of Labor. The question is on income tax benefits when the business makes a profit.

Tax treatment of Georgia LLCs

Good news is that a Georgia LLC offers the members a choice in how they are going to be taxed on income. By default, the LLC is a pass-through entity, meaning that it is not required to pay the same federal or state taxes as a corporation, and the tax burden falls on the owners. Instead, the State of Georgia imposes a $50 annual registration fee. However, an LLC can choose to be treated like a corporation and pay state and federal taxes.

Taxation of a single-member LLC

The owner of a single-member LLC can choose to be taxed as a sole proprietorship, a C corporation or an S corporation.

By default, the member of an LLC is taxed as a sole proprietorship, and personally pays federal income tax on the profits of the LLC, whether or not the profits are distributed to him/her. The owner also pays self-employment tax which includes FICA, Social Security, and Medicare tax. These taxes must be paid on all of the owner's earnings and is usually 15.3% of the taxable income. Naturally, the member can deduct certain business expenses that they incur in order to reduce the taxable income.

If the LLC chooses to be taxed as a C corporation, it pays federal corporate income tax, state corporate income tax at 6% of the federal taxable income, and net worth tax. Net worth tax is payable if the LLC is worth more than $100,000. The member pays tax on any profits distributed to the self. This is known as double-taxation.

If the LLC chooses to be taxed as an S corporation, the owner pays federal income tax, state income tax at 6% of federal taxable income and self-employment tax. The LLC pays net worth tax (also known as franchise tax).

Taxation of a multi-member LLC

By default, members of a multi-member LLC are taxed as a partnership. However, they can opt to be taxed as a C corporation or an S corporation.

If the LLC is taxed as a partnership, then each partner pays tax on his/her share of the profits. For example, if the LLC makes a profit of $1 million, then two members who own 50% each will pay income tax on $500,000 each. This is payable, whether the profits are distributed or not. This tax is in addition to taxation on any other income that the members make elsewhere and self-employment taxes.

If a multi-member LLC chooses to be taxed as a C corporation, then it pays 6% ($60,000) income tax to the State of Georgia plus federal income tax plus net worth tax on the value of the company if it exceeds $100,000.

Federal and state taxes

In order to pay taxes in Georgia, the LLC must apply for a State Tax Identification Number (STIN) online on the State of Georgia’s website or in person at a Georgia Tax Center. The state income tax and net worth tax are payable to the state’s Department of Revenue (DOR).

The choice to be taxed as a corporation is made by filing IRS Form 2553 with the IRS. The form is available on the IRS website. Federal tax is payable to the IRS.

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