Is an LLC the Right Choice for Your Small Business?
- Learn how an LLC can protect your personal assets.
- Discover the tax implications of owning an LLC.
- Find out why you should choose an LLC over an S Corporation.
Perhaps you operate your small business as a sole proprietorship and want to form a limited liability company (LLC) to protect your assets. Or maybe you are launching a new business and want to know your options for setting it up. Fiducial knows the basics of operating as an LLC and why it might be appropriate for your business.
A multi-member LLC is somewhat of a hybrid entity; it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This potential duality may provide the owners with the best of both worlds.
Personal asset protection
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with security. They know that their personal assets are protected from the entity’s creditors (as long as the members do not have to give a personal guarantee to secure the debt). This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, may be subject to personal liability. To go into specific detail as to the legal protection available from an LLC (or a corporation), an attorney should be consulted.
Tax implications of owning an LLC
The members of a multi-member LLC can elect under the “check-the-box” rules to have the entity treated as a corporation (and may then be taxed as a C corporation or choose to make an S corporation election) for federal tax purposes. Otherwise, by default, a multi-member LLC is treated as a partnership for tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits. Then, they are reported on the owners’ individual returns and are taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Code Section 199A pass-through deduction, subject to various limitations. In addition, as long as you’re actively managing the business on a day-to-day basis, you can deduct on your individual tax return your ratable shares of any losses the business generates to the extent of your basis in the LLC. This, in effect, allows you to shelter other income that you and your spouse may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be another important reason for using an LLC over an S corporation. Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be held (for example, non-resident aliens and C corporations cannot be shareholders of an S corporation).
Review your situation
In summary, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you should consider operating your business as an LLC.
Want to discuss the tax ramifications in more detail as to how an LLC might benefit you and the other owners of your business? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
