Limited Liability Company

LLC – The Hybrid

In recent years this relatively new business entity (new compared to corporations that is) has generated a substantial amount of interest due to the fact that it provides both the limited liability of a Corporation and the single level pass through taxation of a Limited Partnership.

These attributes can be either an advantage or a disadvantage depending on certain circumstances. Though it avoids double-taxation of issuing profits to shareholders, you could find yourself paying a very high personal income tax rather than a lower corporate tax. Again, this depends on the circumstances.

Just as with a corporation an LLC is separate from its owners, which helps to ensure the limited liability. It is like its own separate person. As far as tax purposes, the IRS currently allows you the option of treating the LLC like a partnership or a corporation. However, single Member LLCs will automatically have the flow through status.

Other Attractive Features

Unlike with C Corporations and S Corporations, the LLC has a lack of restrictions regarding the number or type of shareholders it may have. The S Corporation while providing the flow-through tax status has severe limitations in this regard. This makes the LLC attractive in that there can be more investors/members if needed to raise sufficient capital for businesses.

With an LLC you also have more flexibility with regard to distribution of profits and losses. Profits and losses can be distributed to various members at the members’ discretion.

In order for the LLC to be taxed as a partnership it must lack two of the following characteristics of corporations. This means if it doesn’t, the IRS will tax it as a corporation, so there is a possibility of double-taxation on shareholder’s profits. Usually 1 & 2 are maintained, items 3 & 4 are forfeited.

• Limited Liability
• Centralized Management
• Free transferability of interests
• Continuity of life

LLCs have their place in the business world, but careful consideration should be made before establishing one. Other drawbacks are not as much established case law; treated differently from state to state, and taxation may not be resolved at the state level.

Keep in mind that if you are coming to Nevada to reduce home-state taxes, any income that flows through is subject to state tax. You can use a Nevada Corporation as a Member to share your ownership though so that not all of the income would be subject to state tax.