Tax Tips
Limited Liability Companies - March 2007
Richard Scrivanich - Partner
Suppose I told you that there is a new way of doing business that combines the advantages of a partnership and a corporation. Sounds ideal, right? Well, such a business entity exists right now. It's called a limited liability company, and here is what it can mean for you.
A business can be conducted in a number of forms, such as a partnership, a regular corporation, or an S corporation. Doing business as a partnership has many tax advantages. Income is taxed only once, and there is great flexibility in how income and deductions are passed through to the partners. But the partners' assets are put at risk, since each general partner is personally liable for the partnership debts and obligations.
Corporations don't have the liability problem, since shareholders aren't responsible for debts of the corporation. However, a corporation's income may be taxed twice, once when the corporation earns it and once when it is distributed to the shareholders in the form of dividends.
Electing to be an S corporation avoids double taxation. But S corporations have many restrictions as to the number and type of shareholders, classes of stock, ownership of subsidiaries, etc.
The limited liability company (LLC), which is being recognized by an increasing number of states, including California, offers a way out of this dilemma. An LLC is owned by investors known as members. It is managed either by the members themselves or by designated managers.
Like shareholders of a corporation, the members' liability is limited to the amount of their investment. Yet, if the LLC is structured properly, it will be treated as a partnership for tax purposes. And there are no restrictions on the number and type of members, as there are with the shareholders of an S corporation.
If you have any questions regarding limited liability companies or any other tax matter, please feel free to give me a call at (562) 698-9891.
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