There are pros and cons to using an LLC and we won't
touch on all of those in this article. If you are considering an LLC,
please call us to discuss your particular situation in more detail.
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.
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.
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.
If you already have an LLC that was in existence before January 1,
1997, and you have a previously established federal tax classification, you will typically
not need to make an election to continue that classification.
However, if your LLC has
only one member and you have been filing as a partnership under the pre-1997 law, your
company will now be forced to file as a sole proprietorship and will not be regarded as a
separate entity.
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.
Since LLC's are 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 tax rates of up to
35%
on ordinary income.
Compare that to the much simpler stock transactions between corporate
owners which are taxed at capital gain rates of 20%. 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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