In the last 5 years or so, there has been a movement away from structuring small businesses as S corporations and more towards forming LLC’s.  S corporations still have unique benefits and should be considered when you start up a new business but LLC’s offer their own unique advantages.

An LLC (Limited Liability Company) is a hybrid business tax structure that blends elements of partnerships, corporations and individuals.

The owner of an LLC is called a “member”.  At the beginning of its business life, a member or members can decide to be treated for tax purposes as a partnership, an individual or as a corporation. 

Unlike an individual or partnership, the LLC offers limited liability protections similar to a corporation. In a corporation, a shareholder is fully protected from creditors for corporate liabilities.  In a partnership or individual there is no such protection.  An LLC offers the same protection as a corporation.

KEY FEATURES OF AN LLC

• An LLC which is formed for a sole individual owner does not need to file a separate tax return.
• An LLC can be treated for tax purposes as a partnership, corporation or as an individual with its members enjoying certain limited liability protections under law.
• Forming an LLC is simpler and faster than a corporation.
• An Operating Agreement which is agreed to by members determines the rules of an LLC.
• An Operating Agreement may be verbal.
• Items of income, deductions, credits and distributions flow through to the members of an LLC in whatever proportions or percentages that are agreed to in the Operating Agreement.
• LLC’s do not issue stock and not required to hold annual meetings or keep written minutes.
• LLC’s do not pay income taxes on profits as profits and other deductions, credits and distributions pass through to the members who pay individual taxes.

The biggest drawback to an LLC vs a corporation is that all profits are subject to social security taxes.  In a corporation, you can structure profits to avoid social security taxes.

Always consult with your tax advisor before starting a new business to determine which form of business is best for your situation.