LLC Taxation Benefits

A limited liability company (LLC) is a form of enterprise that provides a limited amount of liability to its owners. An LLC shares similar characteristics of a corporation, partnership and sole proprietorship. Additionally, LLC’s include a myriad of tax advantages.

Corporations are considered independent entities and are taxed based on the earnings of the company. However, with an LLC, the owners bear the tax burden. Losses, profits, credits and deductions are passed on to each owner who subsequently pays the taxes for the company. The company itself is not taxed. The owners pay only one tax which is based off of partnership rates at both the state and federal level. LLC’s also benefit from the ability to have unlimited shareholders. However, an LLC may also be formed with only one owner.

Most corporations require proportionate tax allocation. Taxes must be allocated evenly among owners or severe penalties will occur. LLC’s are allowed disproportionate tax allocation among owners. Owners of an LLC are free to allocate profits and losses as they see fit and will not face a penalty for disproportionate allocation.

S corporations contain many limitations in regards to the inclusion of company debt in owner taxation. However, LLC owners can include the debt of their company on their taxes. If a company produces significant tax losses, the overall tax advantage of owning an LLC is considerable.

An LLC has the ability to step-up the tax basis of its assets during a transfer of ownership. A step-up in basis means that the value of an inherited asset will be determined by the market value of the asset rather than the purchase price.

Traditionally, first time business owners would form a sole proprietorship. However, LLC’s have become increasingly popular due to the ability to protect personal assets. LLC owners do not have their name on the assets of the business but they maintain the ability to control the assets. LLC owners can not be held personally liable and they are protected from potential creditors.

LLC’s may register shares with the Securities and Exchange Commission. This allows the shares of the LLC to be traded as public securities. Real Estate Investment Trusts under an LLC are significantly cheaper and easier to obtain than they are under a corporation. An LLC is widely considered the best asset protection vehicle to invest in real estate. The owners of an LLC receive a myriad of asset protection including protection on their primary residence.

Charitable gifting through LLC also contains certain advantages. When an LLC owner provides a charitable donation, the tax benefits are passed through the owner’s individual tax return.

The combined tax benefits and asset protection benefits make forming an LLC a very attractive option for many potential business owners.