Forming an LLC
There are many different ways of forming a company such as
a sole proprietorship, a partnership or a corporation. Each
has its own advantages and disadvantages.
One major benefit
of a sole proprietorship or a partnership is the flexibility
in tax reporting of business income and expenses. Business
profits and losses are passed through to the owners/partners
who are then taxed at their individual income tax rates.
The biggest disadvantage of either a sole-proprietorship
or a general partnership is that the owners/partners are personally
liable for all business debts and claims.
Corporation, on
the other hand, gives the limited liability protection to
its owners but does not have the tax flexibility like a sole
proprietorship or a partnership.
Now there is a new and exciting way a company can be formed
where the owners receive the tax advantages of a partnership
and also enjoy the limited liability protection. That entity
is called a Limited Liability Company or a LLC.
The difference between a LLC and a regular corporation is
that a LLC is recognized by the IRS as a "pass through" tax
entity. It is not subject to corporate tax like a regular corporation.
The profits and losses of the entity are passed through to
its owners who then pay taxes at their own individual tax rates.
An LLC can also make an election to be taxed as a corporation
by "checking the box" on the tax return. The owners
should seek advice from a tax specialist in regards to selecting
a "pass through" entity or a "tax paying" entity.
Under certain circumstances, choosing a "tax paying" entity
will result in best tax situation.
Advantages of forming a Limited Liability Company:
- The life of a LLC is not dependent on its owners. A LLC
possesses the feature of unlimited life. If an owner dies
and/or wishes to sell their interest, the LLC will continue
to exist and do business.
- Like a corporation, a LLC will provide limited liability
for its owners.
- Ownership of a LLC is easily transferable.
Also, filing your business as a LLC can often save on taxes.
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