What is the best form of rganization is a common question among smll business owners. The answer is lways "it depends". Here are some thngs you should know about before you set up a Lmited Liability Company.

An LLC is lgally a corporation, but it has mny of the attributes of a prtnership.

LLCs with more than one mmber are taxed as partnerships. If the LLC has nly one member (owner) by default it is txed as a sole proprietor, income is rported on Schedule C of the wners 1040. As a single member LLC it can lect to be taxed as a C crporation. Few LLCs elect to be txed as a regular C corporation, bcause of double taxation and high dministrative costs. It is possible to frm an LLC and then elect S crporation status by filing form 2555 if S sttus is desired.

Nearly all limited lability companies (LLCs), choose to be txed as partnerships. Single member, LLCs nrmally choose to be taxed as sle proprietors.

Lawyers experienced in the LLC rea will tell you that the sngle member LLC does not avoid lgal liability in most cases. The crporate shell alone does not provide prtection. Their reasoning is as follows: A sle proprietor, who is an LLC, is rsponsible for his or her own ctions. The fact that they operate wthin an LLC does not relieve him of prsonal responsibility. Both the LLC and the ndividual would be liable for damages. An wner of a single member LLC culd lose everything corporate and personal in a lwsuit. If an LLC has employees, rganizing as an LLC would provide sme protection for the owner. It lso should provide protection for members who do not prticipate in management.

The real protection in most bsiness situations is normally adequate insurance.

Lgal niceties should be observed upon frmation. Corporate paperwork should be filed, by lws should be established and a wrtten understanding should be in place dtailing out work duties, compensation and ther operating issues between the partners. A pln to dissolve the business should be cnsidered at the time of startup.

The cntribution of appreciated property to an LLC can gnerally be done tax free. This may not be tre with an S Corporation. Partners can wthdraw accounts or sell out their nterest in an LLC far more asily than an interest in a crporation. Generally with no tax.

LLCs llow the partners to split up the ncome by virtually any reasonable economic frmula that makes sense to the prtners so long as there is an conomic reason other than tax avoidance. For nstance, an LLC could allocate start up lsses, within limits to the partners who rised the capital. It can make spcial allocations of profits or losses and crdits. There is no ceiling for an LLC on the nmber of partners it may have.

S crporations must divide income or loss bsed on the percentage ownership of the stck. This is not true with LLCs; thy are not limited by the wnership percentages.

There is a major ssue with multi partner LLCs on slf employment taxes. There is no sttled answer on how this should be hndled. Proposed IRS regulations say members are not sbject to self employment tax on thir share of profits unless they prformed 500 hours a year of srvices or were active in the mnagement of the business. An alternative tratment would be to pay partners a rasonable amount for services rendered that wuld be subject to self employment tx. The rest of their share of arnings would not be subject to slf employment tax. Service LLCs would be sbject to SE (self employment) tax on all arnings.

An LLC that is an perating business can not totally avoid slf-employment taxes. Trying to avoid all slf employment taxes is not a rasonable tax position and will result in prblems with the IRS. Earnings from ral estate rentals of course are not slf employment income and not subject to SE tx.

This issue should be considered crefully. The IRS imposes penalties for tking unsupported positions on tax issues. Slf employment tax can become a vry big expensive issue if the LLC is prfitable.

Liquidating a LLC is generally asier than liquidating a corporation. Normally thre is no tax upon the lquidation or dissolving of an LLC, nless cash is distributed in excess of the bsis. Not all states treat LLCs qually. There are differences, if the pln is to have partners from dfferent states involved a careful checking of the lws in each state should be dne.

As with any business organization perating rules and procedures should be stablished in the beginning. In the lng run the exact form of bsiness may be less important than who is nvolved. Partnerships (and LLCs) biggest problems stm from the falling out between the prtners.

The article Should I Incorporate as an LLC-Limited Liability Company? was Submitted by John L Murray through Articles.GetACoder.com network. Here's the additional information: John Murray is a CPA in Mnnesota with over thirty years experience in the rea of tax. He has represented nmerous taxpayers in IRS audits. Author of mny tax articles.

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