There are several advantages to establishing a bound accountability aggregation and abounding of these compensations circumduct about the tax advantages. A bound accountability aggregation if generally approved as a third another to basic a association or a partnership. Abounding corporations are formed because they action adorable banned on the claimed accountability that the business may ache due to debts or liabilities. Partnerships don’t action the aforementioned affectionate of protection, but do accommodate bigger tax advantages.
A limited liability company works to combine both these features, providing protection against personal liability while also establishing solid tax advantages. In addition to these selling points, a limited liability company is also often preferable to either incorporation or the formation of a partnership because they provide more flexibility than corporations and also because the legalities involved in running tend to be less formal. It is this lack of formality that leads to the tax advantages inherent in a limited liability company.
When it comes to federal taxation laws, a limited liability company has much more flexibility for choosing particular tax advantages. The default choice when there is more than one owner is for the LLC to be treated like a partnership and file the same form, Form 1065. But a multiple-owner LLC can also choose to be treated as either a C corporation or an S corporation. A single-owner limited liability company can choose to be treated for tax purposes as either a sole proprietorship—which is the default choice made by the IRS—or as either a C corporation or an S corporation.
The primary tax advantages in organizing a business entity as a limited liability company is the avoidance of double taxation. In traditional corporate structure, a company’s income is initially taxed and after the profits are divided in the form of dividends, they are subject to taxes again. But a limited liability company’s income bypasses the initial taxation and instead each member of the LLC is taxed based on individual allocations. One of the other tax advantages of a limited liability company is that dividends are not subject to taxation.
Of course, along with tax advantages come disadvantages. After all, if limited liability companies were perfect, there wouldn’t be any other kind of companies. Some states have chosen to impose franchise taxes on LLCs. Of they may require certain annual fees in order to allow you to operate within that state.
The legal ramifications of choosing to become a C corporation or S corporation or simply a sole proprietorship are dense and complex and certainly shouldn’t be made after reading an article on the internet, even articles that provide much more information that this article. Tax advantages of limited liability companies are certainly a selling point—along with the protection they offer from liability—but before making any decision; it is advisable to consult an experienced attorney. One thing to keep in mind about a limited liability company beyond the tax advantages is that they are a fairly recent innovation and therefore legal precedent is in the process of being set right now. In fact, should you face legal action, your case may be the one that sets the precedent.
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