Sheehan & Company - Bulletin - Articles: Limited Liability Companies, A Good Choice of Entity

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Limited Liability Companies, A Good Choice of Entity
By: Janet Rosenblatt, CPA, MST
If you are planning on starting a business in the near future, you may be trying to determine what type of entity structure you should choose. In most cases, a Limited Liability Company (LLC) may be the best choice.

When choosing what type of entity to create, you should consider your business and legal needs as well as the tax ramifications of your choice. Some questions you may ask are:

The type of taxation your business will face will also be a consideration in your decision. Corporations are taxed at the entity level, while partnerships, s-corporations and sole proprietorships are taxed at the owner level. Owners of corporations will suffer a double level of tax when profits, other than salary, are withdrawn from the business. Owners of partnerships and sole-proprietorships will have to pay social security taxes on all business profits, rather than just salary. S-corporations enjoy the income taxation of partnerships as well the social security taxation of a corporation, but are restricted in the amount and types of owners and also have restrictions on contributions to and distributions from the business.

Limited liability companies have quite a few advantages over other business entity choices. A few of the advantages are:

Flexibility and choice of taxation.
Limited liability for the members combined with the ability to actively participate in the management of the company.
Protection for business assets against the claims of the personal creditors of the owners.
Choice in management.

Flexibility and choice of taxation: Limited liability companies have the ability to be taxed as a sole proprietorship (for a single member LLC), partnership (for a multiple member LLC), corporation or s-corporation. The default classification for an LLC is sole-proprietorship or partnership, however the LLC can elect to be taxed as a corporation or s-corporation.

Limited liability for the members: Owners of a limited liability company enjoy the protection of their personal assets from seizure by business creditors that was formerly only available to shareholders of a corporation. Limited partners in a limited partnership will also enjoy this protection, however they are prohibited from participating in the management of the partnership. Limited liability company members can fully participate in the operation and management of their company while still enjoying limited liability protection.

Protection of business assets: The current LLC act provides that while the personal creditors of LLC owners can place a lien on distributions to those owners, they cannot force the sale of assets held by the LLC. This is true even in the case of single member LLCs. The limited partnership act provides for the same treatment, however LLC members do not have the same limitations as those placed on limited partners. Corporations and s-corporations can be forced into a sale situation if the personal creditors of the shareholder were to obtain a majority ownership.

Choice in management: LLCs may be managed by the members (owners), appointed managers, or a board of directors, similar to that of a corporation.

In most cases, an LLC can be the best entity choice for your new business. It may also be wise to convert your existing business into an LLC in order to benefit from the many advantages afforded to LLC owners. In many cases a LLC conversion can be done without tax consequences to the owners.