Limited Liability Company (LLC)
An LLC is a newer form of business organization first appearing in Wyoming in 1977 and have now been adopted by all 50 states and the District of Columbia. An LLC does not have shareholders like a corporation but operates for the benefits of its members to obtain the same limited liability advantages found in corporate entities. The LLC, however, avoids corporate income taxes and passes income through to its members.
An LLC is advantageous in many situations and has become a very popular entity when doing business. It is much more flexible than the corporate options and can provide investor with a variety of different options when working with partners and investors. Thus, the LLC it is a great option for businesses involving multiple individuals and complex financial strategies.
The most important note is that the LLC does not save taxes. Because LLCs are taxed similar to a partnership all income and losses “flow-through” to the members who are therefore taxed at a rate very close to that of a sole-proprietor or partnership.
The most often overlooked tax consequence of operating an LLC is full payment of self-employment tax (FICA). Because self-employment tax does not apply to rents, dividends, interest, and other investment incomes, the LLC is the perfect entity for long-term rental real estate holdings as well as other retirement and estate planning related entities.
Note: An LLC is taxed as a partnership by default but may elect the special S-Corporation status from the IRS. If elected the LLC will be taxed as an S-Corp on the federal level.
Filing requirements: Single-Member LLC entities are not be required to file a separate tax return (the owner – whether an individual or entity – accounts for the income or losses on their return). Where 2 or more individuals or entities are members the LLC must file a separate annual tax return..
Recommended in situations where:
- The business involves multiple individuals (partners and/or investors) and complex financial strategies.
- The entities purpose is to hold long-term rental real estate.
- Extreme privacy concerns exist and the cost of maintaining “extra” entities is outweighed by those privacy concerns.
- Net income is under $40,000 and liability concerns make operating as a sole proprietor unacceptable.
- An estate planning advantage exists to adjust the basis of the LLC assets. This will benefit the other members of the entity upon the death of another member.
Not recommended for situations where:
- The net income from operations is > $50,000 (note: an LLC can elect S-Corp tax status)
- In some states, including California, professionals are not permitted to operate under an LLC. Professionals include Doctors, Lawyers, etc…
Book a consultation with an attorney to discuss your entity requirements and solutions.
- Use of LLC name on all legal documents
- Use of LLC name in all advertisements
- Annual tax filing – IRS Form 1065 (> 1 member)
- Statement of information – (every 1-2 years)
- Must maintain “Corporate veil”
- Separate accounts (checking, credit cards, etc.)