Limited Liability Company

The major advantage of organizing your business as an LLC is that you can protect your personal assets from the creditors of your business. It also takes far less red tape to organize and is generally cheaper to administer, There's also another key benefit of LLCs: You can elect to be taxed as an S corp while retaining the structure of an LLC. (More information at the bottom about this)

 

LLC

Limited liability means you can't be financially responsible for more than your investment in the company

LLC

LLC Pros:

  1. The owner of a single member LLC doesn't have to file a tax return for the LLC, as they only report the activity on their personal tax return.

  2. Ease of setup: Most LLC forms are only a single page for single member LLCs.

  3. Inexpensive to start: The cost of setting up an LLC is also inexpensive, usually just a couple hundred dollars.

  4. Guidelines: The red tape involved in forming an LLC isn't as stringent as that involved with S corps, which also leads to savings on accountant and attorney fees, among others.

LLC Cons:

  1. Self-employment tax: Single member LLC owners are required to pay self-employment tax on income generated in the LLC, which means making quarterly estimated payments to the IRS.

  2. Owners of LLCs must make sure they don't pierce the "corporate veil," meaning they have to operate the LLC separately from their personal affairs. The LLC must not be a shell but an operating entity. There have been cases where a business owner lost their protection because there was no distinct difference between the LLC and its owner."

CASE STUDY

Consider the case of Mike Turner, founder of Front Street Brokers, a real estate agency in Boise, Idaho. When he started his business, which sells high-end homes and properties, he was advised to form it as an LLC, which he did. However, a couple years later, as the business began to earn more revenue, Turner was shocked by the amount of taxes he was paying the IRS.
It was then that his accountant told him how he could elect to be taxed like an S corp while keeping his LLC intact. Turner decided to make the switch. He began paying himself and his wife a modest salary, which he also pays fees on (such as FICA and unemployment insurance), and then paying himself a monthly dividend from the extra profits his company was earning.

"The rules are I must pay myself a realistic salary," says Turner. "I can't pay myself minimum wage, and do the rest in dividends. But in my industry, the average salary is not that high, so I can still take a hefty amount via the dividends." The difference has been a savings of between $6,000 and $8,000 a year in federal taxes. "I feel I get the best of both worlds," he says. "For my small business, I get all the legal benefits of running my small business through an LLC, but I can be taxed as an S corp, which saves me money at tax time."

Legal Disclaimer

The information contained in this website is provided for informational purposes only, and should not be construed as legal advice on any matter.