TAX BENEFITS AND BUSINESS ENTITIES

The standard “corporation” format used by businesses to protect personal assets and minimize personal liability can also include other types of business entities, including S-Corporations and Limited Liability Companies (“LLC”).  The corporation is America’s most popular and oldest form of business entity. However, with the tax advantages of Limited Liability Companies and S-Corporations, other types of business entities are quickly becoming more popular. 

 Limited Liability Companies 

An LLC combines the limited liability shield traditionally associated with corporations, the structural and financial flexibility of partnerships, and the tax benefits of “pass-through” taxation. As a pass-through entity, the LLC pays no income tax. Instead, items of taxable income, gain, loss, and deduction pass through the LLC to its owners, and are reported by them on their separate income tax returns. Similar to the corporation, an LLC is recognized as a separate legal entity from its “members.” Thus, an LLC can own property and commit itself to contractual obligations.

 IRS Treatment of the One-Member LLC 

An LLC with only one member/owner is automatically considered to be a sole proprietorship unless an election is made to be treated as a corporation via IRS Form 8832. Thus, the sole member of an LLC will file Form 1040  (U.S. Individual Income Tax Return), and will include Form 1040, SCHEDULE C (Profit or Loss from Business) with his/her tax returns.

 

Regardless of how many members the LLC has, the LLC may file an Election to be Treated as a Corporation for Purposes of Taxation (IRS Form 8832). If an election is made to be treated as a corporation, the LLC must file Form 1120 (U.S. Corporation Income Tax Return).

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