submitted by Martin H. Abo, CPA/ABV/CVA/CFF
Many people who are already in business and those starting up new ventures are turning to limited liability company status as the preferred form of business organization.
There are many reasons for this, including:
- Pass through of profits and taxes to the owners, to avoid double taxation applicable to regular corporations.
- Limited liability for the owner(s) which is not available with proprietorships and partnerships.
- Absence of the restrictions applicable to S corporations. These relate to the number of shareholders, types of shareholders, and limits on passive income that can be passed-through without prior tax.
- Ability to make special allocations of income, losses and deductions among the partners, whereas an S corporation must pass these through on a pro rata basis.
- Ease of formation. IRS check-the-box rules enable a single owner to obtain the benefits of limited liability for legal purposes, yet be treated like a proprietorship for tax purposes, and avoid the cost of forming a corporation.
- Utilization of the tax advantages of operating losses.
- Many states will still have a franchise tax to pay even if the corporation has elected S corporation status and otherwise would be a flow-through entity.
- An LLC (sole-member) reports his or her income on Form Schedule C of their individual tax return. A separate business return (form 1065) is only required if the LLC has two or more members.
- A business owner, if actively working in his/her corporation, will need to take a reasonable salary, subjecting him/her to state unemployment taxation where a member of an LLC will not be subjected to such a payroll tax.
- An LLC has no loss of power to a board of directors (although an operating agreement may provide for centralization of management authority in a board or similar body).
If you’re expecting to have a high-growth business and would possibly seek potential investors in the future, a corporation may be more suitable.
Also, corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. Otherwise, an LLC would appear to give you the flexibility, similar protection and tax savings you might desire.
