IRA Financial Group
IRA Financial Group

Why Use A Limited Liability Company (LLC)?

  • Easy and inexpensive to form
  • Recognized by all states
  • Limited liability for all members.
  • One level of tax for federal income tax and state income tax purposes (in most cases).
  • Pass through of business losses to the member or members.
  • Can utilize a corporate management structure.
  • Can have one member or multiple members.
  • Flexibility in distributing cash to the members
  • Flexibility in allocating profits/losses to the members
  • Flexibility in conducting business affairs.
  • Can exist indefinitely.

The Advantages of Using a LLC over a Partnership

LLCs and partnerships are treated similarly for tax purposes, both locally and federally. LLCs, like corporations, are recognized as separate legal entities, meaning individual members of an LLC are protected from debts, obligations and liabilities of the company. In an LLC, all members are automatically provided limited liability protection. In contrast, a partnership must have at least one general partner who is personally liable for the debts and other liabilities of the business. In addition, the limited partners of a partnership are generally prohibited from managing the business. In an LLC, all members can freely manage the business without running the risk of losing their limited liability.

The Advantages of Using a LLC over a Sole Proprietor

If you currently operate a business by yourself and report your income on a Schedule C, then you are a sole proprietor. Even though a sole proprietorship is the cheapest form of business, the risks of using a sole proprietorship can end up being the most costly business structures over the long term.

As a sole proprietor you put your personal assets at risk for liability. You also will not receive the benefit of considerable tax savings and will likely have fewer options for growing your business. Sole proprietorships are also much more likely to come under examination by the Internal Revenue Service. And finally, when it comes time to sell or transfer your sole proprietorship, you’ll find that the process is difficult, time consuming, and expensive.

As a sole proprietor, you and your business are one of the same. In other words, your company’s debts are legally your debts. In other words, a legal claim or a lawsuit brought against your business is also a lawsuit brought against you. This means that your personal savings, including your home, car, and investments an be taken from you if your business were to be sued or become insolvent.

By contrast, an LLC is viewed as a legally distinct entity. An LLC provides limited liability for all members. If your business is sued or becomes insolvent, its members will generally not be held personally liable for the debts and liabilities of the LLC.

The Advantages of Using a LLC over a “C” Corporation

An LLC enjoys many of the same advantages of a “C” corporation (a standard business corporation so called because it is taxed under subsection C of the Internal Revenue Code), as well as retaining many of the characteristics of unincorporated entities such as partnerships and sole proprietorships. Like a “C” corporation, the LLC offers its members limited liability (a member is generally only liable up to the amount contributed to the LLC), and like a partnership, the LLC’s earnings are not subject to an entity level of tax (only one level of tax imposes directly to the member), whereas, a “C” corporation imposes a double level of tax (entity level and shareholder level) on distributable income.

Generally the LLC entity form should always be used over the “C” corporation form, unless the entity is anticipating an initial public offering.

Like the shareholders of a “C” corporation, the owners/members of an LLC are generally not liable for the debts of the business beyond the extent of their investment. The owners can operate the business with the security of knowing that their personal assets are protected from the entity's creditors. There are exceptions, such as an instance when an individual member personally guarantees the debts or liabilities incurred by the LLC.

Unlike a “C” corporation, an LLC is treated as a partnership for federal income tax purposes. This can provide a number of important benefits to the owners. Partnership earnings are not subject to an entity-level federal income tax; instead, they “flow-through” to the owners, in proportion to the owners' respective interests in profits, and are reported on the owners' individual tax returns (one level of tax). Thus, earnings of an LLC are taxed only once. An LLC that is taxable as a partnership can also provide special allocations of tax benefits to specific members.

The Advantages of Using a LLC over a “S” Corporation

LLCs and “S” corporations are similar in many ways. From a tax perspective, both are treated as pass-through entities (no double taxation). Both entities provide limited liability to the owners of the business.

The LLC offers far more flexibility than an “S” corporation. In order to be considered an “S” corporation, a company must meet the following requirements:

  • The entity must not have more than 100 shareholders
  • Shareholders must be U.S. citizens or residents, and must be natural persons, so corporate shareholders, partnerships, and multi-member LLCs are excluded
  • The entity must have only one class of stock
  • Profits and losses must be allocated to shareholders proportionately to each one's interest in the company
  • Corporate formalities must be followed

LLCs are under no such restrictions.

The LLC Entity Form –The Right Entity Choice For Most Of Us

Under current law, unless a start-up company wants to go public or a company will be engaged in a complex cross border transaction, there is very little reason to choose to operate as a “C” corporation or a “S” corporation. Most of the non-tax advantages of operating in corporate form are now available in all states in the form of the LLC, and the double tax creates a clear tax bias against the corporate form. An LLC offers all of its members’ limited liability without restrictions on their participation in the venture. Furthermore, ownership interests in the LLC can be freely transferable if its members so choose. For these reasons, it is significantly more common for a new business to select the LLC entity form when starting a new business and not a “C” corporation or “S” corporation.