Limited Liability Companies         

Over the past several years, we have been receiving more and more inquiries from clients about the procedures involved in setting up a limited liability company (LLC).  LLC's became more popular in the 1990s and are now the preferred type of business organization in the twenty-first century for small businesses.


The reason for this is simple. LLC's offer the personal liability protection of a corporation along with the flexibility and tax advantages of a partnership. The personal liability protection means that the members (or owners) of the company cannot be sued for acts of the LLC. 

If you haven't already heard of LLC's, you soon will.


Just like a corporate investor, an LLC member's losses are limited to his or her investment. LLC's also avoid double taxation on distributions or liquidations.

Unlike corporate investors however, LLC members are taxed directly on the gains and losses of the company. Just like with a partnership, the company itself files only an information return with the IRS showing the income distributions to the members. 

While this may sound much like the tax treatment of an S corporation, LLC's actually have greater ownership flexibility and they escape many of the tax restrictions common with S corporations.


If you establish an LLC with two or more members, the company will file a partnership return with the IRS and all of the partnership rules will apply.  If your new LLC has only you as a single member, the IRS will treat your company as a sole proprietorship and you will file a schedule C with your Form 1040. You also have the option of filing a Sub S Election with the IRS and have your LLC governed under the Sub S rules.

Careful Consideration

If you are looking to establish a new business entity in the near future, you would be wise to discuss the tax consequences with us first. While LLC's are "hot" right now, they may not necessarily be the right alternative for you. If your LLC is subject to partnership taxation, the buying and selling of LLC interests between members can generate ordinary income to the selling members in many cases.

This is because your ownership interest in an LLC is actually an ownership interest in the "assets" of the company. The gain or loss associated with the sale of those assets to another member can be subject to very high tax rates in the year of the sale. 

Compare that to the much simpler stock transactions between corporate owners which are taxed at lower capital gain rates.  An LLC may not make sense for you if your company plans to take on many investors who may be looking for an easy "out" down the road.



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