LIMITED LIABILITY COMPANIES

A Limited Liability Company (LLC) is another way that you can structure a business. It is a completely new form of business. It is not a corporation, partnership or a sole proprietorship. However, it has some of the characteristics of corporations and limited partnerships. It is a separate legal entity like a corporation and therefore shields its owners from personal liability but it is entitled to the same tax treatment that partnerships receive. The taxes flow down to the individual owners.

Additionally, in a corporation the owners are the stockholders and in a partnership the owners are the partners. In contrast, in a LLC the owners are called members. A corporation is run by the officers and a limited partnership is run by the general partner. A LLC is managed by one or more managers.

TAX BENEFITS

The LLC generally has the tax benefits of a partnership for federal income tax purposes. The taxes flow down to the members of the LLC. Therefore, the members (owners) are taxed only on their share of the LLC profits. Any gains or losses flow through the LLC to the members. The members then report the income or losses on their personal tax returns. Given the “pass-through” nature of the income, a LLC works well for real estate.

ASSET PROTECTION

Like a corporation, LLCs generally provide that a member is not personally liable for the LLC’s debts and obligations. Rather, they must look to the LLC itself for satisfaction of a debt. This makes the LLC a desirable business structure for holding liability producing assets like real estate.

ESTATE PLANNING

The LLC can provide an excellent vehicle for passing wealth from one generation to another. When property is transferred into the LLC the transferor receives shares in exchange for the property. The shares can then be transferred incrementally to the younger generation as gifts. As long as the value is $10,000 or less per donee each year, the gift is tax-free. This is an excellent way to transfer assets because the transfer is very simple compared to filing a new deed each year. Rather, the shares are simply transferred to the knew owner. Additionally, the parents can retain control over the property by acting as “managers” of the LLC. They can transfer the majority of the asset and yet still remain in control of the property.

DIFFERENCE BETWEEN A CORPORATION AND LLC

Most people form corporations or limited liability companies in order to shield the shareholders/members and officers/managers from personal liability for the debts and obligations of the entity. There may also be various tax advantages to forming these entities which may not be available for sole proprietorships and general partnerships.

WHO SHOULD HAVE A LIMITED LIABILITY COMPANY

Anyone who begins a new business venture should be concerned with protecting their personal assets from lawsuits. Unfortunately, our society is becoming more and more litigious every day and more and more people are finding themselves on the wrong side of law suits. If you can put a legal shield between you and creditors you should do so. Because the LLC is a separate legal entity, it provides its members with liability protection.

Another problem is that the government continues to take more and more from hard working individuals in the form. You as a taxpayer need to be creative and take advantage of every possible break. Anyone concerned with tax liability should consider doing business as a limited liability company.

An LLC can be a good choice for:

- real estate investments,

- passive investments, or

- joint ventures between existing businesses,

- venture capital, and

- entrepreneurial business ventures with a limited number of investors where flow-through tax treatment is desired.