One of the core decisions entrepreneurs must make when forming a new company is which business entity to choose. Depending on the chosen business structure, it will heavily impact the legal and tax implications in the short and long term.
In this article, you will discover the best tax options for a limited liability company (LLC).
Limited Liability Company (LLC) – An Introduction
A limited liability company (LLC) offers a hybrid business structure that combines the best aspects of corporations and partnerships. As its name suggests, the owners (referred to as “members”) enjoy limited liability protection like corporate shareholders.
Hence, the members are not personally liable for business liabilities, and the LLC is not directly responsible for its members’ liabilities. The similarities with partnerships come in the form of tax treatment.
A superior aspect of LLCs is the possibility to run a business with the security of not exposing one’s assets to creditor claims, judgments, and other liabilities that may eventually affect the company.
This reality is not the same as that applied to partnerships, wherein general partners are exposed to liability associated with debts and judgments of the business. Depending on the partner’s participation in the business, even limited partners may be exposed to personal liability at some point.
What is the Best Tax Option for an LLC? – A Realistic Viewpoint
During formation, LLC members can elect to have the entity treated as a partnership for tax purposes. Depending on the members’ circumstances and goals, this option can provide a number of benefits, like no exposition to taxes at the entity level.
Instead of going through “double taxation,” the LLC’s income passes through the company directly to the members’ personal returns. As the company’s financial reports occur through the owner’s individual returns, they are taxed only once.
Additionally, it is possible to deduct several business losses on the member’s tax returns in ratable shares. This possibility allows LLC members to “shelter” other income made by them and their spouses.
Another possibility available for LLC members is electing to be treated as an S-Corp for tax purposes. While the tax treatment is similar to that applied to partnerships, members of LLCs treated as S-Corps do not enjoy special allocations of tax benefits granted to specific partners.
Another factor that makes the partnership tax treatment more interesting than S-Corp status is the lack of restrictions. Under federal regulations, S-Corps have several restrictions, such as no foreign membership, a limited number of members, and the types of ownership interests.
One of the great advantages of forming an LLC is the flexibility enjoyed by members. It is possible to set up an LLC with one or multiple members, guaranteeing limited liability protection with tax benefits of different structures.
What is the Best Tax Option for Your Limited Liability Company? – Immediately Contact an Expert CPA
Identifying the best tax option for an LLC can be challenging if you do not have proper tax assistance. Waste no time with uncertainty – contact Edward D. Quilca, CPA by calling (786) 310-5582 or emailing [email protected] to find the best tax strategy for your LLC business.
