Tax Advantages Of A Limited Liability Company (LLC)

A Limited Liability Company (LLC), also called a Limited Liability Corporation, is a type of business structure that combines different features of a corporation and a partnership. There are various benefits of creating a limited liability company and many of these compensations revolve around the tax advantages. A limited liability company is frequently sought as a third option to forming a corporation or a partnership. Many corporations are established for the reason that they provide attractive limits on the personal liability that the business might suffer because of debts or liabilities. Partnerships don't have the same kind of protection, but do offer better tax advantages.

A limited liability company works to combine both these features, offering protection against personal liability while also creating solid tax benefits.  Besides these selling points, a limited liability company is also frequently preferable to either incorporation or the formation of a partnership because they provide more flexibility than corporations and also since the legalities involved in running have a tendency to be less formal.  It is this lack of formality that causes the tax advantages inherent in a limited liability company. 

As regards to the federal taxation laws, a limited liability company has a lot more flexibility for selecting particular tax advantages.  The default choice when there is more than one owner is for the LLC to be treated as 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.  With traditional corporate structure, a company's income is originally taxed and after the profits are split in the form of dividends, they are subject to taxes again.  But a limited liability company's income bypasses the initial taxation and rather each member of the LLC is taxed based on people allocations.  One of the other tax benefits of a limited liability company is that dividends aren't subject to taxation. 

As with many things in life, along with tax advantages come disadvantages.  After all, if limited liability companies were perfect, there wouldn't be any other type of companies.  Some states have chosen to impose franchise taxes on LLCs.  Or they might require certain annual fees with the purpose of allowing you function within that state. 

The legal ramifications of choosing to become a C corporation or S corporation or just a sole proprietorship are dense and complex and definitely shouldn't be made after reading an article on the internet, even articles that contain more information than this article.  Tax advantages of limited liability companies are certainly a selling point-together with the protection they provide 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 quite recent innovation and as a result legal precedent is in the process of being set right now.  In fact, if you happen to face legal action, your case might be the one that sets the precedent.