A Limited Liability Company (LLC) is Flexible and Also Provides Tax Benefits
Unlike a corporation, a limited liability company (LLC) is a flexible, hybrid type of legal enterprise. They provide the limited liability features of a corporation and the tax benefits and operational characteristics of a partnership. The LLC’s main advantage over a partnership is that the liability of the LLC’s owners (members) for debts and obligations of the LLC is limited to their financial investment. This limited liability for its owners applies in the vast majority of United States jurisdictions. Businesses that engage in professional services requiring a state professional license, such as legal or medical services, may not form an LLC but may find that a Professional Limited Liability Company (PLLC) suits their requirements.
LLC’s Offer Tax Benefits and Liability Advantages
For U.S. federal income tax purposes, an LLC isn’t considered a separate entity from its owners. An LLC is treated by default as a “pass-through entity.” All profits and losses are “passed through” the business to each member of the LLC. This means that an LLC will not pay taxes by itself; rather, the members pay the taxes on their personal tax returns. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes. The individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return. Thus, income from the LLC is taxed at the individual tax rates.
LLCs shield members from personal liability if the business goes bankrupt or injures someone or otherwise incurs legal liabilities. This means that, although your business might fold, courts and creditors will generally not be able to take the member’s personal assets. Separation between business and personal responsibility and assets is maintained.
There Are Some Disadvantages
LLCs generally do not have specific roles like directors, managers, and employees. Unlike corporations, they are not required to have a board of directors or officers. Lack of a traditional management structure can make it difficult for the company and especially investors to determine authority for various company functions. This management structure of an LLC may be unfamiliar to those used to corporations and could be used by some to gain unfair advantage. Creation of an LLC operating agreement may define roles and eliminate confusion.
LLCs are usually subject to self-employment taxes unless members choose to be taxed like a corporation. Choosing to be taxed like a corporation may lead to increased tax liabilities. For this reason, when choosing to start an LLC, it’s wise to speak to a knowledgeable lawyer who can explain this fully. Since laws and taxes vary from state to state, the best choice for a LLC may be some state other than the one under current consideration.
DiJulio Law Group