What Are the Tax Advantages of LLCs?

By Jill Lewis

A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability protection for its members: LLC members cannot be held personally liable for the debts or obligations of the company. LLCs are also attractive to new business owners because LLCs enjoy many tax advantages as compared to other entities such as corporations and partnerships.

Avoiding Double Taxation

Limited liability companies are not subject to the double taxation that is imposed on corporations. This means that the profits of the LLC only need to be claimed on the individual member's tax returns and not at the LLC level. This is called "pass through" taxation and means simply that the LLC itself does not have to file taxes.

Self-Employment Tax

Because the members are taxed and not the LLC, a limited liability company's profit is not treated as earned income of its members and therefore not subject to self-employment tax. However, a managing member's share of that profit is considered income and is subject to the self-employment tax.

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Electing Tax Status

A limited liability company has much more flexibility than other business entities in that it can choose whether to file as a corporation, a partnership, a sole proprietorship or an "S" corporation. This flexibility allows the members to choose the tax status that is most advantageous to their organization.

Less Paperwork

Because it does not have the tax consequences of a corporation, an LLC is subject to much less paperwork and administrative red tape when forming the company and filing taxes.

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What Is a Disregarded Entity LLC?
 

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Is a Corporation the Same as an LLC?

At one time, there were only three options for company organizers choosing a form of business organization: the sole proprietorship, the partnership and the corporation. Then in the 1970s, the limited liability company (LLC) was introduced in some states. As of 2010, LLCs are authorized by all 50 states and the District of Columbia. It is similar to the corporation in some ways and different in others.

Advantages & Disadvantages of a Limited Liability Company

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. The advantages can range from liability protection to tax benefits, while drawbacks may include lack of uniformity and consistency among the state statutes governing LLCs. A savvy business owner should consider all these advantages and disadvantages before deciding whether a limited liability company is the preferred structure for her enterprise.

Tax Differences of LLCs & PCs

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the same limited liability benefits as a corporation. All states now allow one-member LLCs; some states allow professionals to form professional limited liability companies, or PLLCs. A professional corporation, or PC is a special type of corporation designed for professionals such as lawyers and accountants. LLCs and PCs are taxed quite differently.

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