written by Aaron Henry
When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one type of entity may be more appropriate than another. One type of business entity that is continuing to increase in popularity is the limited liability company, or LLC.
The LLC combines several favorable characteristics of a traditional partnership, in which all members are entitled to participate in the management and operation of the business, with those of a corporation, in which the owners, directors, and shareholders are generally protected from liability for the corporation’s debts. That means the personal assets of the business owners’ would generally be protected if the business failed, lost a lawsuit, or faced some other catastrophic event. The members’ capital contribution is the basis for the extent of their liability. In addition, members are able to fully participate in managing the business without endangering their limited liability status.
For tax purposes, the profits (or losses) from the LLC pass through to its members, who pay tax on the income when filing their individual returns. In other words, income from the LLC is taxed at the individual tax rates. In comparison, income from corporations is taxed twice, once at the corporate level and again when distributed to the shareholders. As you can imagine, more tax savings often occur if a business is formed as an LLC rather than a corporation.
However, it is impossible to forget that Congress recently increased the top marginal individual income tax rate to 39.6%, placed a .09% additional Medicare tax on wages over $200,000 (single taxpayers), and imposed a 3.8% net investment income tax on higher-income taxpayers. At the same time, there have been continuing discussions among members of both political parties of lowering the corporate rate from the current 35% to something around 28 or 25% to make the United States more competitive with foreign nations. If this happens, many highly profitable LLC businesses may need to rethink their situation and consider switching to a corporate form.
Forming an LLC involves many requirements, but the benefits can be substantial. Please call us if you have any questions 417-881-0145.