The limited liability company or “LLC” is a popular form of structuring a business. What is attractive of an LLC is that it combines aspects of both a corporation and a partnership—possessing both liability protection and flexible tax treatment.
An LLC is similar to a corporation because the owners enjoy liability protection—meaning, the owners are not personally liable for business debts and liabilities; and it is also similar to partnerships and sole proprietorships because an LLC is generally taxed as a “pass-through” entity, which means that the business itself does not pay taxes on profits. Rather profits and losses “pass-through” to the owners, who pay tax on their respective share of LLC income. Before the creation of LLCs, a business owner had to choose between a “single tax” regimen or limited liability.
Although the LLC is a hybrid between a corporation and a partnership, it is not for everyone; some of its features may be unattractive to clients. For example, the LLC members generally must immediately recognize business profits, and pay income tax on them, even if the profits are not actually distributed to the members. Consequently, a partner may have a tax liability but without the corresponding income to pay for it. By contrast, the shareholders of a corporation only pay income tax on profits that are actually distributed to them.
Lewis-Traut & Ruswick, APC carefully considers the short and long-term goals of business owners before helping clients form a business structure.