| Should I form a Limited Liability Company (LLC)? |
Our clients often ask us to recommend the type of entity or corporate structure that best suits their company. Unfortunately, we are not in the business of providing tax or legal advise. Fortunately, we are a service company that is designed to fulfill filing requirements of most types of corporate entities. We educate our customers and help them make more informed decisions.
Limited Liability Companies and general corporations are taxed differently. LLC’s have the same tax advantages as partnerships. In these structures, the gains and losses of the businesses are reflected on the members personal tax returns. Losses can lower your total taxable income. Currently there is no corporate tax for distributions or gains. (See the LLC IRS Regulations article for more details). With a general corporation, the profits are taxed twice. First there is a corporate tax on profit. Then the money that is distributed to the owners is taxed a second time as personal income.
One of the greatest benefits of forming an LLC is that it offers flexibility to the owners. The members are permitted to actively participate in the management. On the other hand, the owners of limited partnerships and the shareholders of corporations have little or indirect control over the business operations. Corporations have bylaws drawn up which are often more rigid than the operating agreements of Limited Liability Companies.
As in corporations, investment in LLC’s is encouraged because the risk is limited to what is invested. However, stock corporations rather than LLC’s may be more desirable for businesses wishing to become publicly traded. This difference can be attributed to the makeup of each entity. A Limited Liability Company consists of members rather than shareholders/directors of a corporation. Therefore, with an LLC the ownership is tracked by the contribution made or by what is written in the operating agreement. Think of how confusing this tracking would be if applied to an LLC with hundreds of owners each with a varying percent of ownership. However, if the business consists of fewer owners that do not often buy in or sell out, the membership is easily maintained.