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USING LLC FOR YOUR BUSINESS AND ITS ADVANTAGES

 

If you presently manage your small enterprise as a sole proprietorship, the contemplation of establishing a Limited Liability Company (LLC) to safeguard your assets may have crossed your mind. Alternatively, if you are embarking on a new business venture and seek insights into structuring it appropriately, here is a fundamental overview of operating as an LLC and the rationale behind its suitability for your business.

An LLC possesses a hybrid nature, as it can be configured to emulate a corporation in terms of owner liability, while concurrently exhibiting attributes akin to a partnership for federal tax considerations. This dual nature offers owners the advantages of both paradigms.

Asset Protection:

Similar to shareholders in a corporation, individuals owning an LLC, referred to as "members" rather than shareholders or partners, generally enjoy limited liability concerning the business's debts, limited to the extent of their invested capital. Consequently, owners can manage the business with the assurance that their personal assets remain shielded from the claims of the entity's creditors. This safeguard surpasses that offered by partnerships, where general partners bear personal liability for business debts. Even limited partners may incur personal liability if actively involved in managing the business.

Tax Considerations:

Owners of an LLC have the option, pursuant to the "check-the-box" regulations, to elect the entity's treatment as a partnership for federal tax purposes. This election presents several advantages to owners. For instance, earnings from the partnership are not subject to entity-level taxation; instead, they pass through to the owners in proportion to their respective interests, being reported on individual tax returns and taxed only once.

Qualifying as qualified business income, the income passed through makes owners eligible for the Section 199A pass-through deduction, subject to specific limitations. It is crucial to note that this deduction is temporary, available until 2025, unless Congressional action extends its validity.

Furthermore, as active managers of the business, owners can deduct their proportionate share of any business losses on their individual tax returns. This affords them the opportunity to offset other income, including that of their spouse if married.

Specialized Tax Allocations:

An LLC, taxable as a partnership, enables the implementation of special allocations of tax benefits to specific partners. This feature serves as a compelling reason to prefer an LLC over an S corporation, which offers tax treatment resembling a partnership. Another advantage is that LLCs are not subject to the restrictions imposed by the federal tax code on S corporations, such as limitations on the number of owners and the types of ownership interests issued.

Comprehensive Consideration:

In summary, opting for an LLC structure provides a corporate-style shield against creditors while leveraging the tax benefits associated with partnership status. Given these advantages, a thorough evaluation of operating your business as an LLC is warranted. We encourage you to reach out to us for an in-depth discussion on how an LLC could be a prudent choice for you and fellow stakeholders.

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