Posted: 4. October 2019 by: Rupert Tennant

How Does an LLC Pay Taxes?

Most small businesses are set up as one of two things: they are either LLCs or a sole trader company. This is the case for smaller businesses; other larger companies are incorporated in different ways as well.  When you’ve registered as an LLC, you’re taxed as a corporation, and that’s the main difference between those and sole traders.

It’s important that you know how to pay taxes as the owner of such a company. This is what will make you prepared for all the duties and obligations in regards to this.

What’s an LLC?

An LLC stands for Limited Liability Company. That means that when the company owes money and when it’s sued for its debts, you’re not liable for them with your own money as the owner. Instead, the liability is limited to the funds that the company has on its own. Once those are depleted, the company is bankrupt and closed.

The difference between this and a sole trader company comes from the fact that the sole trader owner can be liable for the company debts with their own money and that’s a more difficult position to be in.

Steady rate

Another great benefit of being registered as an LLC comes from the fact that these companies pay a flat tax regardless of how much income they make. This is not the case with sole traders since their taxes increase as they earn more. Having a flat tax rate is a better way to go not only because you’re paying less, although that helps.

The rate is set at 18 percent at this point, and the major benefit of that fact comes from the ability to plan your business expenses and therefore to know how much money you can count on.

How it’s paid

The taxes are paid on a yearly basis, and that’s done via the self-assessment tax return. That doesn’t mean that you pay the tax once a year too. The tax could be paid in four equal instalments, but it needs to be reported once a year and then paid for the previous year’s income.

It’s essential that you send your tax returns on time and that you pay each of the instalments. This is an obligation you’ll need to honour since you’ll get a fee if you’re late with payments or returns.

Additional payments

There are other obligations a business has towards the government other than income tax. This is the case for an LLC and for any other business as well. Most of these are about paying the salaries of your employees and therefore the taxes on that income.

These are mostly paid via what’s called PAYE and stands for Pay as You Earn. This is how the company pays the income tax and other national insurance contributions on the salary of each of the employees. Some also pay off their student loans and other long term payments this way.

The accounting

One of the reasons the companies choose to be set up this way is because it’s rather easy to pay taxes as an LLC. This means that when you have a small company, you may not need to hire an accountant right away. This is a way to save money on accounting expense early on.

However, as the company grows bigger, you may need to hire an accountant since that will allow you to focus on more important things. At the same time, you’ll be sure that an accountant has followed the tax code to the letter.

Should you do it?

The question then remains should you register your company as an LLC or as a sole trader. It’s not a question that anyone can answer for you. It’s the company that you have, and that company you plan to have that should decide that matter for you.

There are also numerous benefits of setting up a sole trader company that you should take into account as well. These include the fact that you can use your own money to fund the business when the company needs additional funding. At the same time, this brings the issue of debt that you’ll need to cover personally.

Conclusion

There are a few ways to fund and establish a company. The two most popular for small businesses are LLC and sole traders. The LLC stands for Limited Liability Company. That means that the company is liable for its debts only with their own assets and when it doesn’t have enough money, it’s being declared bankrupt.

There are other benefits from being taxed in this way. Mostly they are about the fact that you can predict your tax rate and that you can plan for your expenses early on. It gives you an edge over sole trader companies.