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
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.
TYPE OF RETURN FILED
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.
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.