If you’ve been following our blog for the past couple of Fridays, you know that we’re covering four basic tax tips to consider when forming a new entity. If you missed the first two, read up on the C-Corporation and S-Corporation.

The four considerations we’ve been covering are:

  1. Pass through of gains
  2. Pass through of losses
  3. Transfer of assets to the entity, and
  4. Transfer of assets from the entity

Today we will cover the LLC. Before we get into the four considerations, it is important to make one distinction: the difference between an entity’s legal treatment and its tax treatment. An LLC is a type of limited liability entity (hence, Limited Liability Company) that allows the owners protection from legal liabilities. (This differs from a partnership, which is a contractual relationship between the parties, and from a Corporation, which is a creation of a state’s corporate law.) An LLC can elect its tax treatment and be taxed as if it were a Corporation or as Partnership. The distinction is made clearer below.

1. Pass through of gains

The default treatment of an LLC is to be treated as a Partnership. Any gains had by the entity will automatically be passed through to a shareholder’s personal income statement. That means that the entity doesn’t pay income taxes, only shareholders. This is similar to the treatment of the S-Corp, but with fewer restrictions. A member of an LLC or a Partnership can contract with the other members as to how the gains are allocated and distributed to the shareholders.

2. Pass through of losses

Again, the default treatment of an LLC is to be treated like that of a Partnership. Any losses will pass through to a shareholder’s personal income statement. Losses can be allocated according to the terms of the operating agreement.

3. Transfer of assets to the entity

An LLC differs from both a C-Corp and S-Corp in this respect. A transfer of assets to an LLC is not a taxable event, regardless of the amount of control owned by the shareholder transferring the assets. This could potentially make starting your new company less expensive than with other entity types, especially when there are multiple shareholders.

4. Transfer of assets from the entity to shareholders

When an LLC decides to transfer assets to a shareholder, this event is not usually taxable. Either upon distribution or liquidation a shareholder is responsible for the taxes, if any have even arisen.

Overall, an LLC is a great tax efficient way to get your company started. In most cases there will not be a tax on transferring assets to and from the company. There is also no double taxation of profits, thus saving the shareholders money. Additionally, if there is a loss, a shareholder may benefit from a tax reduction.

Since there are different on going requirements for an LLC than for a Corporation, start here to consider any additional steps you may need to take.

Deborah Sweeney

Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With extensive experience in the field of corporate and intellectual property law, Deborah provides insightful commentary on the benefits of incorporation and trademark registration. Education: Deborah received her Juris Doctor and Master of Business Administration degrees from Pepperdine University, and has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in corporate and intellectual property law. Experience: After becoming a partner at LA-based law firm, Michel & Robinson, she became an in-house attorney for MyCorporation, formerly a division in Intuit. She took the company private in 2009 and after 10 years of entrepreneurship sold the company to Deluxe Corporation. Deborah is also well-recognized for her written work online as a contributing writer with some of the top business and entrepreneurial blogging sites including Forbes, Business Insider, SCORE, and Fox Business, among others. Fun facts/Other pursuits: Originally from Southern California, Deborah enjoys spending time with her husband and two sons, Benjamin and Christopher, and practicing Pilates. Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Deborah, and MyCorporation, have previously been honored by the San Fernando Valley Business Journal’s List of the Valley’s Largest Women-Owned Businesses in 2012. MyCorporation received the Stevie Award for Best Women-Owned Business in 2011.

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