Business Growth: LLCs and Related Legal Entities

This continues our series on establishing the right legal entity for your business. I am not a legal expert. I encourage you to consult with an attorney.

The IRS defines a Limited Liability Company (LLC) in the following terms,

“A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.”

Benefits of an LLC

Incorporate.com lists several advantages to an LLC:

“This business structure has many advantages, including:

• Owners have limited liability from business debts and obligations.
• Owners can report their share of profit and loss on their individual tax returns without filing a separate corporate tax return.
• Owners do not need to be U.S. citizens or permanent residents.
• LLCs do not need to hold annual meetings or record meeting minutes (though we recommend it).
• LLCs can be owned by individuals or other companies.
• LLCs do not have the same corporate formalities as a corporation.”

You can establish an LLC quickly and inexpensively for each endeavor.

Disadvantages of an LLC

The IRS states “The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return.”

The Limited Liability Company Center outlines disadvantages to an LLC:

• Earnings are subject to self-employment tax
• Terminates if 50+% of capital and profit interests are sold or transferred within 12 months
• May lose ability to use the cash method of accounting in certain situations
• If treated as a partnership cannot take advantage of certain stock options
• A lack of uniformity in LLC statutes may confuse entities working in multiple states
• Some states do not tax partnerships but do tax LLCs

Consult an attorney to determine if an LLC would offer the benefits you desire without the disadvantages.

Saturday we will discuss the advantages and disadvantages of a partnership