Do you operate a sole proprietorship or partnership and thinking of forming an entity? Do you wonder which might be right for you?
Choosing the ideal entity type for your business is a very important decision. The type you choose will have long lasting effects as the type will determine how you are protected under the law, your taxes, and other issues.
Many business owners choose to form a limited liability company (LLC) due to the many benefits it can offer. An LLC protects its owners from personal responsibility for its liabilities and debts. It is considered a hybrid entity as it can be structured similarly to a corporation for owner liability purposes as well as partnership for federal tax purposes.
LLCs offer more flexibility than other corporation types. For example, as the owner of an LLC, (known as a member), you generally aren’t liable for business debts except for your own investment. This means you can operate the company with a sense of security since you know your personal assets will be protected.
LLCs also offer far greater protection compared to partnerships. In a partnership, the owners are personally liable for the debts of the business.
For federal tax purposes, LLC owners have the option to elect under the “check-the-box rules” to have their entity treated like a partnership. This can provide multiple benefits to the owners as partnership earnings aren’t subject to an entity-level tax. Instead of flowing through the entity, they flow through the owners. This means that the profit is reported on the owners’ individual returns, and they are only taxed one time.
Overall, an LLC can provide many tax benefits and can give owners corporate-like protection from creditors. It is important to note that each state has different regulations and statutes, so it is important to contact a tax professional for assistance.
If you have questions regarding if an LLC is the right option for you, speak with your attorney and CPA to understand all of the implications.
