What are the Tax Advantages of Creating a Limited Liability Company?

 An LLC, or Limited Liability Company is the term that describes one of the business structures that you can use when you establish your business.  It is a hybrid of two other business structures – the corporation and the sole proprietorship or partnership – that provides a number of specific advantages, the most immediate of which is that it limits a company’s owner’s personal liability when faced with litigation or claims against it. In addition to this benefit, limited liability companies are attractive for a number of financial reasons, including the availability of pass-through income taxation. Let’s take a look at the tax advantages of creating a limited liability company.

Limited liability companies offer some of the most advantageous characteristics of corporations without many of the obligations, duties and formalities that come from choosing that organizing structure. That is one of the reasons that it has become such an attractive option for single owner companies.  In addition to limited liability, business owners who choose to identify as LLCs are able to decide whether they prefer to be taxed in the same way that sole proprietors are – with income treated as personal income – or to be taxed at the lower rate that corporations are taxed at for the first $75,000 of their income. Choosing the former makes a business what is known as a ‘disregarded entity’, while the latter can make a big difference in the amount of cash you want to put back into your business.

Another advantage of forming your business as an LLC is that you are able to create both life insurance policies and retirement funds that have larger maximum contributions for yourself. You are also able to lease personal assets, such as a home office or business vehicle, back to the LLC and write it off as a business expense. Doing this not only lowers your business’s taxable income, but also provides you with greater household income.

There are many nuances to choosing what type of organizational structure you should choose when establishing your business, and many details that those considering choosing the LLC status need to know. For example, the owners of LLCs are still required to pay self-employment taxes in the same way that sole proprietors do, and they are required to pay taxes on their distributive share of any profits.  By the same token, LLCs are able to pass through their business losses as offsets of any other nonbusiness income. But in Pennsylvania, LLCs do have to pay a capital stock tax.

Those who are considering establishing as LLCs who want to be taxed as a corporation can do so simply by filling out the appropriate form, but should seek advice from an expert in business law first. The attorneys at Erik B. Jensen Attorneys at Law have extensive experience and knowledge of the complexities of business organization, and are happy to walk you through your decision and provide you with the advice and assistance that you need.