We have talked extensively on this blog about how important it is to incorporate your business, and how the best option for many small businesses is to become an LLC or Limited Liability Corporation. However in this post I want to go into detail on the practical advantages for LLCs.
Check-the-box taxation
An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation, providing much flexibility.
Limited liability
Meaning that the owners of the LLC, called “members,” are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity.
Some of the other advantages include:
- Much less administrative paperwork and record keeping than a corporation.
- Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
- Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
- LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (see recent D.C. decisions).
- LLCs in some states can be set up with just one natural person involved.
- Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (see, for example, the Virginia and Delaware LLC Acts).
- Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members
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