| What is the best form of organization is a common | | | | LLCs allow the partners to split up the income by |
| question among small business owners. The answer is | | | | virtually any reasonable economic formula that makes |
| always "it depends". Here are some things you should | | | | sense to the partners so long as there is an economic |
| know about before you set up a Limited Liability | | | | reason other than tax avoidance. For instance, an LLC |
| Company. | | | | could allocate start up losses, within limits to the |
| An LLC is legally a corporation, but it has many of the | | | | partners who raised the capital. It can make special |
| attributes of a partnership. | | | | allocations of profits or losses and credits. There is no |
| LLCs with more than one member are taxed as | | | | ceiling for an LLC on the number of partners it may |
| partnerships. If the LLC has only one member (owner) | | | | have. |
| by default it is taxed as a sole proprietor, income is | | | | S corporations must divide income or loss based on |
| reported on Schedule C of the owners 1040. As a | | | | the percentage ownership of the stock. This is not true |
| single member LLC it can elect to be taxed as a C | | | | with LLCs; they are not limited by the ownership |
| corporation. Few LLCs elect to be taxed as a regular | | | | percentages. |
| C corporation, because of double taxation and high | | | | There is a major issue with multi partner LLCs on self |
| administrative costs. It is possible to form an LLC and | | | | employment taxes. There is no settled answer on |
| then elect S corporation status by filing form 2555 if S | | | | how this should be handled. Proposed IRS regulations |
| status is desired. | | | | say members are not subject to self employment tax |
| Nearly all limited liability companies (LLCs), choose to | | | | on their share of profits unless they preformed 500 |
| be taxed as partnerships. Single member, LLCs | | | | hours a year of services or were active in the |
| normally choose to be taxed as sole proprietors. | | | | management of the business. An alternative treatment |
| Lawyers experienced in the LLC area will tell you that | | | | would be to pay partners a reasonable amount for |
| the single member LLC does not avoid legal liability in | | | | services rendered that would be subject to self |
| most cases. The corporate shell alone does not | | | | employment tax. The rest of their share of earnings |
| provide protection. Their reasoning is as follows: A sole | | | | would not be subject to self employment tax. Service |
| proprietor, who is an LLC, is responsible for his or her | | | | LLCs would be subject to SE (self employment) tax |
| own actions. The fact that they operate within an LLC | | | | on all earnings. |
| does not relieve him of personal responsibility. Both the | | | | An LLC that is an operating business can not totally |
| LLC and the individual would be liable for damages. An | | | | avoid self-employment taxes. Trying to avoid all self |
| owner of a single member LLC could lose everything | | | | employment taxes is not a reasonable tax position and |
| corporate and personal in a lawsuit. If an LLC has | | | | will result in problems with the IRS. Earnings from real |
| employees, organizing as an LLC would provide some | | | | estate rentals of course are not self employment |
| protection for the owner. It also should provide | | | | income and not subject to SE tax. |
| protection for members who do not participate in | | | | This issue should be considered carefully. The IRS |
| management. | | | | imposes penalties for taking unsupported positions on |
| The real protection in most business situations is | | | | tax issues. Self employment tax can become a very |
| normally adequate insurance. | | | | big expensive issue if the LLC is profitable. |
| Legal niceties should be observed upon formation. | | | | Liquidating a LLC is generally easier than liquidating a |
| Corporate paperwork should be filed, by laws should | | | | corporation. Normally there is no tax upon the liquidation |
| be established and a written understanding should be in | | | | or dissolving of an LLC, unless cash is distributed in |
| place detailing out work duties, compensation and other | | | | excess of the basis. Not all states treat LLCs equally. |
| operating issues between the partners. A plan to | | | | There are differences, if the plan is to have partners |
| dissolve the business should be considered at the time | | | | from different states involved a careful checking of |
| of startup. | | | | the laws in each state should be done. |
| The contribution of appreciated property to an LLC | | | | As with any business organization operating rules and |
| can generally be done tax free. This may not be true | | | | procedures should be established in the beginning. In |
| with an S Corporation. Partners can withdraw | | | | the long run the exact form of business may be less |
| accounts or sell out their interest in an LLC far more | | | | important than who is involved. Partnerships (and |
| easily than an interest in a corporation. Generally with | | | | LLCs) biggest problems stem from the falling out |
| no tax. | | | | between the partners. |