When forming a new business, it’s important to make the right decision for personal liability as well as minimizing the company’s tax liability. A limited liability company is a relatively new option and designed to give entrepreneurs another option for a business entity. There are some advantages to forming an LLC as opposed to other options. This article looks at some of those advantages and disadvantages of filing for a limited liability status.
What is a Limited Liability Company?
An LLC is a business entity that is formed under state law. Some regulations can differ by state but the basic rules are similar from state to state. An LLC is similar to a corporation when it comes to personal liability of the company’s owner(s). Where income tax liability is concerned, an LLC can be treated more like a sole proprietorship or partnership.
Personal Debt Liability of an LLC
One of the biggest advantages of a limited liability company is it allows limited personal debt liability to the business owner(s). If the business has formed an LLC and the company has difficulty paying its debt, generally the company that has a debt claim can go after business assets, not personal assets. A business that has not elected to form an LLC or another type corporation could risk personal assets to satisfy a business debt.
Many companies that are offering open credit terms may request a member of the LLC to sign a personal liability wavier. By having a member sign a waiver, they reduce their risk of uncollectable accounts. Signing a personal liability wavier could result in holding an LLC member personally liable for business debt. This action could negate one the biggest advantages of forming a limited liability company.
Tax Advantage of a Limited Liability Company
When it comes to personal debt liability, an LLC is treated more like a corporation. When it comes to income tax liability, an LLC is treated more like a sole proprietor ship or partner ship. Most corporations’ tax liability is based on net profits from the business. The officers of the corporation are also taxed separately for their own personal income that’s derived from the business.
With an LLC, the official members pay their taxes as personal income tax and are not required to pay separate income tax from the business. For federal income tax purposes, the limited liability members file a 1040 Form and Schedule C, Profit and Loss From Business. Other IRS forms also apply for the purposes of an LLC.
Before electing a particular business entity classification such as an LLC, the advantages and disadvantages should be carefully considered. It’s advisable to seek the advise of a legal professional before a decision is made. Filing for an LLC can be accomplished through an attorney, on-line or at state offices.
Source:
irs.gov
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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