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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Is a Corporation the Same as an LLC?

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How to Create an LLC for Investments

Limited liability companies, or LLCs, are flexible business entity structures that have characteristics of a corporation as well as a partnership. However, each state can impose different requirements to create a LLC, though in most jurisdictions, the formation process is similar. Moreover, most state laws allow you to form a LLC for any legitimate purpose, such as to hold and trade investments.

The Pros & Cons of LLCs

An LLC, or limited liability company, is a relatively new form of business entity that is a hybrid between a corporation and partnership. The major benefit of an LLC is that is provides its owners -- called members -- with the advantages of both a corporation and partnership, while avoiding the disadvantages of each. However, depending on the needs of your business, there are also disadvantages to the LLC structure.

What Is a Disregarded Entity LLC?

The type of business entity called a limited liability company, or LLC, is a creation of state law. Though LLCs have become commonplace, the IRS has not created a new category for these businesses, but has rather adapted existing tax categories for this new type of company. One of the primary benefits LLCs are intended to provide is the ability for business owners to report the company's profit or loss on their individual returns.

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