Limited Liability Company (LLC – The Hybrid)
In recent years this relatively new business entity (new compared to corporations that is) has generated a substantial amount of interest due to the fact that it provides both the limited liability of a Corporation and the single level pass through taxation of a Limited Partnership.
These attributes can be either an advantage or a disadvantage depending on certain circumstances. Though it avoids double-taxation of issuing profits to shareholders, you could find yourself paying a very high personal income tax rather than a lower corporate tax. Again, this depends on the circumstances.
Just as with a corporation an LLC is separate from its owners, which helps to ensure the limited liability. It is like its own separate person. As far as tax purposes, the IRS currently allows you the option of treating the LLC like a partnership or a corporation. However, single Member LLCs will automatically have the flow through status.
Other Attractive Features
Unlike with C Corporations and S Corporations, the LLC has a lack of restrictions regarding the number or type of shareholders it may have. The S Corporation while providing the flow-through tax status has severe limitations in this regard. This makes the LLC attractive in that there can be more investors/members if needed to raise sufficient capital for businesses.
With an LLC you also have more flexibility with regard to distribution of profits and losses. Profits and losses can be distributed to various members at the member’s discretion.
Due to the flexibility of an LLC and being able to use Corporations or any entity type as a Member, they are fast replacing the use of Limited Partnerships and S Corporations. Since there are less formal requirements with Corporate Record Keeping (Resolutions, Minutes, etc.), many people are opting to set up LLCs and simply have it taxed like a Corporation (no flow through of income).
Unlike Limited Partnerships, Members of an LLC have greater protection from Liability than a General Partner. In the past, using a Corporation as a General Partner was popular, but the LLC offers an easier solution for protection.
Whether or not to use an LLC or other entity type depends on your goals. Give us a call and we’ll be happy to discuss this with you further.
Keep in mind that if you are coming to Nevada to reduce home-state taxes, any income that flows through is subject to state tax. You can use a Nevada Corporation as a Member to share your ownership though so that not all of the income would be subject to state tax.
- No limit on the number of owners (Members)
- Flow through of income helps to avoid double-taxation
- Greater flexibility with distribution of income or loss allocation
- Liability of Members limited to contributions
- Taxable income flows through to partners even if it’s not distributed
- Limited liability to single-Member LLCs not recognized in all states