Tax benefits of an LLC

Discussion in 'LLC Formation' started by tgillespie, Jun 7, 2011.

  1. tgillespie

    tgillespie New Member

    As a partner in a new LLC, how will I benefit from working under an LLC? What are some of the tax pitfalls or aspects I need to be aware of going forward? Although I am a majority holding member of my LLC and I receive income out of the LLC, am I still considered personally self-employed?
  2. ChooseJim

    ChooseJim New Member

    The primary advantage to forming an LLC is that you have limited liability in case the company is sued, so if your business does something wrong, the owners can't be personally held liable for the claims. Individual members can still be held liable for what they do individually, but each owner isn't personally liable for the company as a whole.

    The other advantage can be for tax purposes, depending upon how your LLC is set-up. LLC's are only recognized by states and not the IRS, so the IRS considers you to be the same as if you weren't an LLC at all. If you're the only member of an LLC, then it's the same as being a sole proprietor, or self-employed, and you'd file your business activity on Schedule C of your personal tax return. If there is more than one member, then you are considered a Partnership and will file your business activity on Form 1065 Partnership Tax Returns. Both sole proprietors and partners have to pay self-employment tax, unless their business activity is considered passive (eg, real estate rentals).

    But if you prefer, you can elect to be treated as an S-Corporation whether you have members or not, and will need to file a Form 2553 to declare yourself an S-Corporation. This can help you avoid self-employment tax on the full income the company generates, though you will still need to pay yourself a reasonable salary.

    But all this is very complicated and you should definitely seek the help of a professional to guide you further, as every company is different and the various issues cannot be covered in this sort of forum.
  3. directinc_becky

    directinc_becky New Member


    Since its creation, the S-Corporation has increasingly become the preferred form for many small businesses. The S-Corporation is similar in structure to that of a C-Corporation, but must meet a few further requirements. In fact, an S-Corporation is initially formed as a C-Corporation by filing the articles of incorporation with the Secretary of State. The C-Corporation can then become an S-Corporation when an extra step is taken by filing with the IRS.

    Avoid "Double Tax"

    The primary benefit of an S-Corporation is that it allows the shareholders to receive profits free of taxation at the corporate level. The profits will only be taxed at the individual level, thereby avoiding the "double tax" that C-Corporation shareholders are subject to. (C-Corporations are taxed at the corporate and individual level).

    However, not all C-Corporations are able to take advantage of the S-Corporation status. A corporation is only eligible for the S-Corporation election if it meets the following list of ownership requirements:
    The company must have no more than 100 shareholders (a husband and wife qualify as one shareholder).
    All shareholders in the company must be individuals and not other corporations or LLCs (estates, some exempt organizations and certain trusts qualify as shareholders).
    No shareholders can be non-resident aliens.
    There can only be one class of stock in the company (this limitation disregards differences in voting rights).
    The company making the election cannot be a bank or thrift institution, an insurance company, or a domestic international sales corporation (DISC).
    Each shareholder must consent to the S-Corporation tax status (as explained in column K of IRS form 2553).
    No more than 25% of the company's gross corporate income may be derived from passive income.

    Limited Liability Company (LLC) - with comparison of LLC to S-Corporation

    Today, many businesses are forming as a Limited Liability Company (LLC) and are finding that an LLC offers the "best of both worlds" of corporate forms. An LLC allows for pass-through taxation (see "Tax Advantage" below), thereby avoiding the "double tax" of a C-Corporation, yet also affords its owners the personal liability protection of a corporation.

    Tax Advantage

    The popularity of the LLC is primarily based on the Tax Advantage. An LLC operates in most ways as a corporation, yet the distributions to its "members" (shareholders) are not subject to taxation at the corporate level. Instead, the distributions are "passed through" the corporate level and are taxed only at the individual level. Therefore, the LLC avoids "double taxation."
    Personal Liability Protection

    Corporations and LLCs are separate entities from their owners. Since the two are separate, the personal assets of the owners (such as their personal residences, and personal bank accounts) are not reachable by business creditors.
    LLC or S-Corporation?

    As mentioned above, a C-Corporation that satisfies certain requirements can choose to file as an S-Corporation. The primary benefit of an S-Corporation is that it allows the shareholders to receive profits without taxation at the corporate level. Instead, the profits will only be taxed at the individual level, thereby avoiding the “double tax” that shareholders are usually subject to.
    If an S-Corporation is also not subject to the "double tax," are there situations where an LLC is still preferable?

    An advantage of an LLC is that the formation and ownership requirements are less stringent. Usually, an S-Corporation can issue only one class of stock, while an LLC may offer a variety of classes. The S-Corporation also limits the number of shareholders to one hundred or less, and prohibits non-resident aliens from possessing ownership in the company. Further, S-Corporation shareholders cannot be other corporations, LLCs, or partnerships. An LLC has no such limits to ownership.

    The LLC also offers an advantage in management flexibility. The LLC can be "member-managed," meaning that it would be managed directly by the shareholders. Or the owners of the LLC can agree to have the business “manager-managed,” meaning that the management can be structured and delegated from the owners to managers.
    Why not Choose an LLC?

    Although the LLC form is preferable in many ways, a C-corp or S-corp may still be the best form in many circumstances. The primary reason that a C-corp or S-corp may still be preferable is the simplicity by which the stock can be sold or otherwise transferred. A sale of an ownership interest in an LLC must meet certain requirements, while a sale of corporate stock virtually has no limitations. As mentioned above, other favorable aspects of the corporation include the public's familiarity with the form and lower state filing fees. Finally, the "pass through" tax advantage may be less beneficial to businesses that are small enough to take advantage of the 15% and 25% tax rates.

    Note that although every state allows corporations to have a single shareholder, a small minority of states require that an LLC have more than one Member. The rest of the states allow a single Member LLC.

    Hope this helps!
    Becky Canary-King

    Drew Hudgins likes this.
  4. Reece

    Reece Member

    Thanks for all of the additional info, Becky!

  5. leo

    leo Member

    This is a very old post, but the meat of it still holds true today. For businesses that are owned entirely by individuals (not other LLCs or other entities), creating an LLC and filing taxes as an S-Corp is often the best way to go. In order to outline the value of this structure as well as it's special requirements, we've published an in in-depth STARTicle on the topic:

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