Running a limited liability company (LLC) requires a company to ensure South Carolina corporate compliance. That includes the filing of necessary reports and payment of corresponding fees. Among these obligations are taxes.
A lot of startup companies choose the LLC structure because of the benefits that it offers. One of them is asset protection. The company will be a separate legal entity. So the owners, who are called members, will not be held personally liable for any of the actions and debts of the LLC.
Understanding How LLC Taxation Works
LLCs are pass-through entities by default when it comes to taxation. That means that the company will not be taxed at a corporate level. Instead, the members will report business profits and losses on their personal tax returns.
South Carolina corporate compliance includes the payment of property taxes. It is important for a company to understand these to avoid any legal issues or fines.
Aside from the abovementioned, here is how LLC taxation works:
- Members pay South Carolina taxes on profits minus the state allowances or deductions.
- Members pay federal income taxes on profits minus federal allowances or deductions.
- Some South Carolina LLCs pay sales taxes.
- LLCs with employees pay payroll taxes on workers’ salaries.
Federal Income Tax
In most cases, a South Carolina LLC will not be paying income taxes directly to the federal government. That is because its default tax treatment is either a sole proprietorship if it is a single-member LLC or a partnership if it is a multi-member LLC.
Single-member LLC owners report all business income and losses on their personal tax return using the tax form 1040 of the Internal Revenue Service (IRS). These are reported on Schedule C. However, members may have to attach additional Schedules depending on where they get their income.
Meanwhile, members from multiple-member LLCs use form 1065 since their IRS default tax is a partnership. Members may also need to attach additional Schedules depending on their source of income.
The current rate for self-employment tax is 15.3%. Individuals can deduct business expenses from their income.
LLCs are also allowed to choose to be taxed as a C corporation or S Corporation.
For a C Corp tax treatment, the company will have to file federal corporate income taxes using tax form 1120. To elect for this treatment, an LLC should file IRS Form 8832. Once its application is approved, its tax situation will change. It will no longer be a pass-through entity in terms of taxation. So, the company will be taxed at a corporate level. The IRS will not consider the owners as self-employed. The IRS will also not assume that all the business profits are being distributed to the company owners every year.
Those that decide to elect S Corporation tax status should also file at a federal level using form 1120-S. The election for this tax code status will be done using IRS Form 2553. The S Corp status allows the company owners to split business income between a distribution and salary. The owners who also work for the company should be paid a reasonable salary and pay taxes for them. However, they are allowed to take allowable deductions. Check this article to find out more about the S Corp election.
State Business Tax
As stated earlier, LLCs are pass-through entities in terms of taxation. That also applies at the state level. If the company decides to be taxed as a C Corporation, it will have to report and pay state corporate income taxes. The flat rate in the state is 5%.
In such cases, the LLC will also have to pay corporate license fees. These are franchise taxes based on the company’s net worth. Specifically, the fee will depend on capital stock, paid-in, or capital surplus. The rate in the state is $1 for every $1,000 or a fraction thereof plus a flat $15 additional charge. The minimum license fee in the state is $25.
State Individual Income Tax
To ensure South Carolina corporate compliance, the LLC members should pay state taxes on all the money that they earn from the company using form SC1040 for single-member LLCs and SC1065 for multi-member LLCs. The state allows the application of regular allowances, adjustments, exemptions, and deductions.
Standard rates for state personal income taxes will apply. They are as follows:
- $0+ – 0%
- $3,070+ – 3%
- $6,150+ – 4%
- $9,230+ – 5%
- $12,310+ – 6%
- $15,400+ – 7%
State Employer Tax
If an LLC hires employees, then it will have to pay employer taxes. Some of these are paid to the IRS. Check these with the agency.
The LLC should also report and pay employer taxes to the state. The company will have to withhold the employee income taxes and pay them to the Department of Revenue (DOR).
The company will have to register the business with the DOR using form SCDOR-111. After the registration, the LLC will file withholding taxes periodically. It can be monthly or quarterly. Use tax form WH1601, 1605, or 1606. It is also necessary to reconcile the withholding taxes annually. These have to be filed using form WH-1606. Check with the DOR to find out more information.
It may also be necessary to register with the Department of Employment and Workforce and pay state unemployment insurance taxes. The registration for these taxes can be done using tax form UCE-151. Then, the company will have to file form UCE-120/101 quarterly to report wages and pay unemployment insurance taxes.
Sales and Use Tax
LLCs that sell goods to customers residing in South Carolina will have to collect and pay sales and use taxes. For this purpose, the company has to register with the DOR. Then, it should make sales tax payments periodically. Use form SCTC-111 for the registration. The DOR will issue a sales tax license. After the registration, the LLC will have to submit sales tax returns to the DOR either monthly or quarterly using form ST-3.
Other Possible Taxes and Obligations
Depending on the industry the company is in, its activities, and the location of its primary place of business, LLCs may have to file additional tax forms and pay more taxes. Some possible taxes include:
- Rental Surcharge
- Casual or Use Excise Taxes
Generally, LLCs do not file annual reports in South Carolina. However, if an LLC chooses to be taxed as a C Corporation or S Corporation, then it has to submit Form CL-1 Initial Report of Corporations within 60 days with the Secretary of State and pay the $25 filing fee. The state also requires a State Tax ID Number before filing the initial report.
After filing the initial report, it will have to file SC1120 if it is taxed as a C Corp or SC1120S if it is taxed as an S Corp annually with the DOR.
If the company is doing or plans to do business in other states, then it has to register with the governing agencies in those states. Doing business often refers to having physical presence, hiring employees, or soliciting business in the state. Complete descriptions may be found on the LLC Act of those states.
Registration in other states may also mean that the company may have tax obligations in those states as well. It is always best to check with the governing agency to prevent any problems or penalties.
Ensuring State Compliance and Getting Expert Help
Doing business in South Carolina requires compliance with all state obligations, which includes tax requirements. Failure to do so may lead to fines or even put a company at risk of losing its good standing status with the state. In worst cases, the state may even decide to administratively dissolve the LLC.
Administrative dissolution is when the state governing agency takes away the rights, powers, and authority of the LLC due to failure to comply with its obligations. If that ever happens, the company will have to undergo the reinstatement process.
However, the submission of tax forms and payment of corresponding fees is only one of the South Carolina corporate compliance requirements that LLCs should comply with. The obligations of the company will start once it decides to organize and register its business in the state.
For instance, an LLC will have to complete the business formation process. That includes the submission of formal paperwork and payment of corresponding fees. Companies are also required to appoint and maintain a registered agent in the state of South Carolina. For a complete list of qualifications, check out the article South Carolina Registered Agent.
LLCs have a lot of responsibilities. It may be hard to keep track of state obligations and requirements. In such cases, it may be best to work with a reliable third-party organization like DoMyLLC. Contact our team of experts and discuss your needs.
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