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Q.What are some of the advantages to forming an LLC?
A.Some of the advantages the LLC affords its members include:
- Limited liability protection for all members regardless of whether they actively manage the LLC, such that unless a member personally guarantees a debt or obligation, or fails to form or maintain the LLC properly, the member may not be held personally liable for the LLC's debts and obligations.
- Pass-through taxation to eliminate the potential for double taxation.
- No restrictions on permitted members, such that non-resident aliens and corporations can be members of an LLC.
- Flexibility in structuring the LLC, such that ownership and voting rights can be established in unconventional ways while still enjoying the benefits of pass-through taxation and limited liability protection.
- And, the sole proprietor who forms a single member LLC can achieve income tax treatment identical to a sole proprietorship while simultaneously benefiting from limited liability protection from the business debts and obligations.
There are also some additional tax benefits afforded the LLC, and not the S Corporation. First, whereas a contribution of appreciated property to an S corporation is a tax-free event only if the contributing shareholders control 80% or more of the stock after the contribution, the same contribution to an LLC with pass through taxation is tax free regardless of the contributing member’s percentage of control. Secondly, whereas the liquidation of an S corporation interest is a taxable event and is treated as if the corporation sold the liquidated assets at their fair market value to the shareholder, the liquidation of an LLC is generally a tax-free event.
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