Are you currently running your small business as a sole proprietorship, or are you in the early stages of launching a new venture? If so, you might be contemplating the idea of forming a Limited Liability Company (LLC) to safeguard your assets and navigate the complexities of business ownership. Let's delve into the fundamentals of operating as an LLC and explore why it could be a strategic choice for your business.
- A Hybrid Entity for Optimal Protection:
- An LLC is a unique hybrid entity that combines features of a corporation for owner liability purposes and a partnership for federal tax purposes. This dual structure offers business owners the best of both worlds, providing a balanced approach to liability protection.
2. Shield Your Personal Assets:
- Much like shareholders in a corporation, LLC owners, referred to as members, generally enjoy limited liability. This means that their personal assets are typically shielded from the business's debts, offering a layer of security. This level of protection surpasses that provided by partnerships, where general partners can be personally liable for business debts.
3. Strategic Tax Planning:
- LLC owners can leverage the flexibility offered by the "check-the-box" rules, allowing the entity to be treated as a partnership for federal tax purposes. This choice unlocks various benefits, such as pass-through taxation, where earnings flow through to individual owners, avoiding entity-level taxes. Owners can also benefit from deductions like the Code Section 199A qualified business income deduction, offering potential tax savings. (Keep in mind that this deduction is temporary. It’s available through 2025, unless Congress acts to extend it.)
- Actively managing the business enables owners to deduct their shares of any business-generated losses on their individual tax returns. This unique advantage allows for the strategic offsetting of other income, providing additional tax benefits.
4. Tailored Tax Allocations:
- An LLC taxed as a partnership can allocate tax benefits selectively to specific partners, a feature that sets it apart from S corporations. Unlike S corps, LLCs face no restrictions imposed by the federal tax code regarding the number of owners or the types of ownership interests that can be issued.
In summary, choosing an LLC for your small business not only grants corporate-like protection from creditors but also offers the tax benefits of a partnership. It’s a comprehensive solution that aligns liability protection with tax advantages. If you’re contemplating this path, reach out to us for a detailed discussion on how an LLC might be the right fit for you and your fellow owners.
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
