You've beaten the odds. Your business has succeeded and your profits are growing. But you struggle with the uncertainty of whether you are operating under the right legal form. Should you incorporate? Form a partnership? Perhaps you should consider a form of business that has become very popular: the LLC.
Limited liability companies (LLCs) offer a flexible alternative to partnership and corporate legal forms. While partnerships provide a seamless pass-through of income and losses to partners, they offer little protection of personal assets from creditors. Corporations, on the other hand, provide asset protection, but income can be taxed at both the corporate and individual levels. LLCs make available the best of both worlds: asset protection with pass-through of income and losses directly to the owners.
LLCs are not the only form of business to allow this. S corporations are used by small, closely held entities to achieve the same goals. But LLCs are preferred under certain conditions. For example, income and losses in an LLC can be allocated to members disproportionately, thereby allowing for different ownership classes. S corporation income must be allocated to members based on ownership percentage. Also, unlike S corporations, LLC members can be individuals, trusts, or any other type of entity. This may provide more options in estate planning.
In the real estate industry, LLCs often get the nod over S corporations because it may be easier to increase basis and allow for the deduction of losses.
Deciding on a legal form for your business is not easy. Each form has its advantages and disadvantages. The best first step is to sit down with your tax and legal advisors and share your goals. The proper form of business can be the launching pad you need to reach the next level of success.
Source: Julie R. Dhingra CPA, APC
Julie R. Dhingra, CPA-APC