There are several advantages to establishing a limited liability
company and many of these compensations revolve around the
tax advantages. A limited liability company if often sought
as a third alternative to forming a corporation or a
partnership. Many corporations are formed because they offer
attractive limits on the personal liability that the business
may suffer due to debts or liabilities. Partnerships don't
offer the same kind of protection, but do provide better tax
advantages.
A limited liability company works to combine both these features,
providing protection against personal liability while also
establishing solid tax advantages. In addition to these selling
points, a limited liability company is also often
preferable to either incorporation or the formation of a partnership
because they provide more flexibility than corporations and
also because the legalities involved in running tend to be
less formal. It is this lack of formality that leads to the
tax advantages inherent in a limited liability company.
When it comes to federal taxation laws, a limited liability
company has much more flexibility for choosing particular
tax advantages. The default choice when there is more than
one owner is for the LLC to be treated like a partnership
and file the same form, Form 1065. But a multiple-owner LLC
can also choose to be treated as either a C corporation
or an S corporation. A single-owner limited liability
company can choose to be treated for tax purposes as either
a sole proprietorship-which is the default choice made by the IRS-or
as either a C corporation or an S corporation.
The primary tax advantages in organizing a business entity
as a limited liability company is the avoidance of double
taxation. In traditional corporate structure, a company's
income is initially taxed and after the profits are divided
in the form of dividends, they are subject to taxes again. But a limited
liability company's income bypasses the initial taxation and
instead each member of the LLC is taxed based on individual
allocations. One of the other tax advantages of a limited
liability company is that dividends are not subject to taxation.
Of course, along with tax advantages come disadvantages. After
all, if limited liability companies were perfect, there wouldn't
be any other kind of companies. Some states have chosen to
impose franchise taxes on LLCs. Of they may require certain
annual fees in order to allow you to operate within that state.
The legal ramifications of choosing to become a C corporation
or S corporation or simply a sole proprietorship are
dense and complex and certainly shouldn't be made after reading
an article on the internet, even articles that provide much
more information that this article. Tax advantages of limited liability
companies are certainly a selling point-along with the protection
they offer from liability-but before making any decision;
it is advisable to consult an experienced attorney. One thing
to keep in mind about a limited liability company beyond the
tax advantages is that they are a fairly recent innovation
and therefore legal precedent is in the process of being set
right now. In fact, should you face legal action, your case
may be the one that sets the precedent.
