Business people and those starting up new ventures are checking into the benefits of limited liability companies (LLC’s) as the preferred form of business organization. There are many reasons for this, including:
- An LLC allows the pass through of profits and taxes to the owners, to avoid double taxation applicable to regular corporations.
- There is limited liability for the owner(s) of the LLC which is not available with a sole proprietorship and New Jersey partnerships.
- There is a significant absence of restrictions applicable to S corporations. These relate to the number of shareholders, types of shareholders, and limits on passive income that can be passed-through without prior tax.
- Under the tax code, the members can make special allocations of income, losses and deductions among the partners, whereas an S corporation must pass these through on a pro rata basis.
- How easy an LLC is to form? IRS check-the-box rules enable a single owner to obtain the benefits of limited liability for legal purposes, yet be treated like a proprietorship for tax purposes, and avoid the cost of forming an “S” or “C” corporation.
- Many states like New Jersey, still impose have a franchise tax even if the corporation has elected S corporation status and otherwise would be a flow-through entity.
- An LLC (sole-member) reports his or her income on Form Schedule C of their individual tax return. A separate business return (form 1065) is required if the LLC has two or more members.
- Unlike an “S” or “C” corporation, a business owner, if actively working in his/her corporation, will not be subjected to such a payroll tax.
- An LLC has no loss Board of Directors (although an operating agreement may provide for centralization of management authority in a board or similar body).
If you’re planning for a high-growth, high revenue business and may seek potential investors in the future, a corporation may be the preferred choice. Also, corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy, absent a contingency agreement in a membership agreement. Otherwise, an LLC would appear to give you the flexibility, similar protection and tax savings you might desire.
At Hanlon Niemann & Wright, we often recommend the right kinds of business organizations for clients. We’ll be glad to discuss the pros and cons of limited liability companies, partnerships, S corporations, C corporations, and sole proprietorships with you to help you decide on the business vehicle that is most appropriate for your needs. Contact Fredrick P. Niemann toll-free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com today.