Why an LLC?
LLC Provides Businesses with Many Tax and Liability Advantages Over Other Forms of Entities
By Kenneth J. Bloom
If you are starting a new business, or are currently a sole proprietor and are considering incorporating, it is important to understand the advantages and disadvantages of the various forms of entities available.
The most common forms of business entities include partnerships, S Corporations, and regular corporations. However, for many small businesses, the best form of entity is the limited liability company, commonly known as an LLC.
A LLC is a separate business entity that is owned by investors known as members. It is managed either by the members themselves or by designated managers. The LLC offers many of the benefits of the aforementioned entities, but also has some unique advantages as well.
One of the key benefits of the LLC is that a member's liability is limited to the amount of their investment in the LLC. Therefore, a member is not personally liable for the debts of the LLC. This is similar to a regular corporation.
If the LLC is structured properly, it will be treated as a partnership for tax purposes, and the income from the LLC is taxed directly to the members at their income tax rates, which may be generally lower than a corporate tax rate.
Another feature of the LLC is that there are no restrictions on the number and type of members the LLC has, like there are with shareholders of an S Corporation.
Because the LLC is hybrid of a partnership and corporation, a comparison of the entities will provide further information on the advantages of an LLC.
In a partnership, income is taxed only once and there is great flexibility on how income and deductions are passed through to the partners. This is also true for an LLC.
However, in a partnership, the partners' assets are put at risk since each general partner is personally liable for the partnership's debts and obligations.
Corporations do not have a liability problem since shareholders are not responsible for debts of the corporation. However, a corporation's income may be taxed twice, once when a corporation earns it and once when it is distributed to the shareholders in the form of dividends.
Electing to be an S corporation avoids double taxation. But S Corporations have many restrictions to the number and type of shareholders and classes of stock.
Therefore, depending on the circumstances and type of business you are involved in, an LLC may make the most sense and allows the investors to receive benefits for liability purposes and income tax purposes.
If you are considering incorporating, the experts at Bloom, Bloom & Associates can help you determine which method is right for you. For more information about incorporating, or to schedule an appointment to discuss incorporating in more detail, contact Jonathan Goldberg at 248-932-5200.