Consider this new business form
Many business owners incorporate to protect their personal assets from creditors and lawsuits. The price they pay may include double taxation, potential loss of privacy, additional formalities, and various operating restrictions.
If the owners try to avoid double taxation by operating as an S corporation, they face additional limits on ownership and earnings.
The limited liability company (LLC) is a relatively new legal entity which avoids many of these disadvantages, while combining some of the best features of partnerships and corporations.
An LLC exists separately from its owners, who thus avoid personal risk for most company obligations.
Like an S corporation, the LLC can pass its income through to shareholders without being taxed at the company level. Unlike an S corporation, the LLC has much more flexibility in the types of income it can earn, and it has few restrictions on ownership.
Forming an LLC may require as few as two steps: drafting a written LLC agreement and filing with the responsible state agency.
Although an LLC is the best choice for many businesses, it is not for everyone. Their biggest disadvantage may be their newness. Several details of LLC tax treatment have not been resolved, and federal and state legal precedents have yet to be established.
In addition, state rules for LLCs vary widely and must be researched for each location before proceeding.
Changing from an existing corporation to an LLC creates additional pitfalls since liquidating an old corporation could have severe tax consequences.
Although starting as an LLC might be the best choice for a new company, the cost of converting a similar business already operating as a corporation might be prohibitive.
Whether or not you adopt this business format, your choice will have important legal and tax effects which should be discussed in advance with your tax and legal advisors. For more information, give us a call.