Main Advantages of Limited Liability Companies

The "limited liability company" (LLC) continues to gain popularity among manufacturers. What are the main attractions? One of the prime benefits is that an LLC avoids the "double taxation" that plagues traditional C corporations. With a C corporation, income is first taxed at the corporate level and then again when it is paid out to shareholders in the form of dividends. Another key point is that the LLC can provide the same level of asset protection as a C corporation does.

Here is a brief summary of several LLC benefits that should be of interest to business owners:

Limited liability: As with a C corporation, LLC owners (called "members") have limited liability for business debts. If the LLC is handled properly, each member's personal assets aren't subject to business creditors. Instead, liability is limited to the amount invested in the manufacturing business.

Partnership-type taxation: Typically, an LLC with multiple owners is taxed like a partnership (single-member LLCs are generally taxed like sole proprietorships). Therefore, items of income and deduction are passed through to the members and reported on their personal tax returns. The LLC pays no tax itself. Caveat: If it is preferable, a special election may be made to have the LLC taxed like a corporation.

Management flexibility: There are no special restrictions on managing an LLC. The members can manage the business or hire an independent manager. In contrast to an S corporation, which is limited to 100 shareholders, an LLC can have an unlimited number of members.

Ease of recordkeeping: Unlike C corporations, LLCs do not have to hold annual meetings, although this is still a valuable practice. But an LLC must establish an operating agreement specifying details of the membership interests and other items. Professional advisers can provide guidance.

Deductions and profits: Like a C corporation, "ordinary and regular" business expenses - including a member's salary - may be deducted from LLC profits before income is allocated to the members. An LLC is not required to allocate profits and losses in proportion to the ownership interests. This benefit is not available to S corporation owners.

Citizenship: All S corporation owners are required to be U.S. citizens or permanent residents. In contrast, there is no such requirement for LLCs.

State approval: The LLC is now a recognized form of business ownership in all 50 states and the District of Columbia. Of course, the applicable state laws still control.

This is not to say that the LLC format is for everyone. For instance, conversion of an existing business to LLC status could result in a large tax liability on appreciated assets. Other restrictions may apply. Consult with your trusted advisor regarding each situation.

Which entity structure should you choose?
We can help you determine the best structure for your business. Contact our professionals for more information on how your entity choice could save you time, money and resources.

Mihaela Cruceana is a Supervisor in the Tax Services Department and is based in our Boca Raton office. She prepares tax returns and provides tax planning for small businesses, partnerships and individuals. Her primary focus is on professional service providers (physicians, attorneys and brokers) and the real estate industry, providing high level tax services to those with significant real estate holdings. She also provides payroll tax and property management services for doctors, family-owned companies and other small businesses. Contact her by clicking the Email Daszkal Bolton link below or call her at 561.953.1483.