When you operate a business, it is critical that you choose the right business structure. This decision will have significant consequences on the future success of your company. In general, the type of structure will affect the way you operate on a daily basis and both your tax and personal liability. Many business owners opt for an LLC as a compromise between the two other common designations. See why this can be a benefit or disadvantage depending on your circumstances.
The Benefits of an LLC
To start off, there are many important advantages to using an LLC. First, you can form a Limited Liability Company without all the formalities required for a corporation. For the small business owner, this means a lot less paperwork and documentation. Thus, you will not be required to hold meetings or maintain corporate minutes. This allows you to focus on your business instead of dealing with business law requirements.
One of the other attractive features of LLCs is that you can still take advantage of tax benefits. In the world of taxes, LLCs are treated much like sole proprietorships. This means they are pass-through entities that will not be liable for double taxation. Yet, the owner of the LLC can always choose to be taxed as a corporation if it proves to be more advantageous. In this sense, an LLC is a flexible option for your business needs.
In addition, LLCs are able to use the cash accounting method. Under this accounting concept, income is not counted until it is actually received from the payor. The benefit to this is that it makes your accounting process as simple as possible. Furthermore, it may allow for the deferral of certain taxes because the revenue is not immediately recorded.
A Look at the Disadvantages
LLCs can be problematic in the way they treat the owners' income. Each owner is subject to the self-employment tax rate. The profits of the LLC are also treated the same. This is because profits are automatically attributed to the owner's income. Therefore, it is possible that some owners could end up paying more in taxes than those who operate corporations.
There is one other aspect of LLC taxation that is unfavorable: the taxation of fringe benefits. If you receive medical or group insurance through the LLC, this amount will be treated as income. Again, this income will be taxed at the self-employment rate which is typically higher. Therefore, you will have to consider whether it is financially viable to create an LLC.
For more information about representation in contract litigation or a business law case, contact us at TR Spencer Law Office.