Reasons an LLC might be the ideal choice for your small to medium-sized business
Choosing the correct business entity is a crucial decision for any business. The entity you pick can affect your tax bill, liability, and other issues. A limited liability company (LLC) is an attractive choice for many businesses. It can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with several benefits.
Like the shareholders of a corporation, the owners of an LLC (called members rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Therefore, an owner can operate a business with the security of knowing that personal assets (such as a home or individual investment account) are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. The general partners are personally liable for the business’s debts in a partnership. Even limited partners can have personal liability if they actively manage the company.
Electing classification
LLC owners have the option, under the “check-the-box rules,” to have the entity treated as a partnership for federal tax purposes. This can bring significant benefits. For instance, partnership earnings are not subject to an entity-level tax. Instead, they “flow through” to the owners in proportion to their respective interests in the profits and are reported on the owners’ individual returns and taxed only once. If the income passed through to you is qualified business income (QBI), you’ll be eligible to take the QBI deduction, subject to various limitations.
In addition, since you’re actively managing the business, you can deduct your ratable shares of any losses the business generates on your individual tax return. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This flexibility is a key reason for choosing an LLC over an S corporation, which has similar tax treatment to a partnership. Another advantage of an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued. For instance, an S corp can’t have more than 100 shareholders and can only have one class of stock, whereas an LLC has no such limitations.
Evaluate the options
An LLC can protect you from creditors while providing taxation benefits as a partnership. Be aware that the LLC structure is allowed by state statute, and states may use different regulations. Contact me at 856-665-2121 to discuss how using an LLC or another option might benefit you and the other owners.
Ronald J. Cappuccio, J.D., LL.M.(Tax)
