Advantages of an LLC
LLC AdvantagesA limited liability company (LLC) has many advantages as a form of business entity:
* Pass through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level nodouble
* Limited liability - the members (owners) of the LLC, are protected from liability for acts and debts of the LLC.
* An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing the correct option for your business.
* Can be set up with just one natural person involved or, in some states, one owner which may be an business itself.
* No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).
* No loss of ...view middle of the document...
* Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a salary to the shareholders working in the LLC, can be passed through as distributions of profits and are not subject to self-employment taxes.
* Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
* If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting.
* An LLC which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
* There is a lack of uniformity among LLC statutes. Businesses that operate in more than one state may not receive consistent treatment.
* In order to be treated as a partnership, an LLC must have at least two members. An S corp can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.
* Some states do not tax partnerships but do tax LLCs.
* Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
* Conversion of an existing business to LLC status could result in tax recognition on appreciated assets