Thinking about forming a limited liability company (LLC)? This popular business structure protects your personal assets and offers flexibility--but you should look carefully before you make a move.
"[LLCs] combine the corporate advantages of limited liability with the partnership advantages of pass-through income, so earnings are treated like those in partnerships, sole proprietorships and most S corporations," says Brian Wiegand, president of Business Filings Inc. in Madison, Wisconsin. Income and losses pass through to the owners, who are taxed on their personal tax returns, as opposed to a corporation, where income is taxed twice--once on the corporation's returns and once on the owner's.
While an LLC lets you avoid double federal taxation, Wiegand warns, "Some states impose corporate income taxes on LLCs, so owners may have to pay personal as well as corporate [state] taxes."
Why the discrepancy? "This relatively new entity is in transition," explains Wiegand, whose 3-year-old firm sets up LLCs and S corporations for start-ups with fewer than 50 employees. "Rules and regulations are changing, so the future of LLCs is still uncertain."
If your state does impose double taxation, you may elect to have your LLC taxed as a corporation. Why? "To retain profits in the business, where they're taxed at the [lower] corporate--rather than personal--rate," Wiegand explains.
About 35 percent of Business Filings' clients form LLCs; most opt for flow-through treatment of earnings. As to liability, it's "generally limited to the amount of money each [owner] has invested in the LLC, not unlike a corporation's shareholders," he says.
Should you form an LLC or an S corporation? Wiegand recommends asking an attorney or accountant which entity would most benefit your business.