Limited Liability Company Structuring Requires Tax Choices ...

Home ? TechNews ? Limited Liability Company Structuring Requires Tax Choices

Siesta Key, FL (PRWEB) April 24, 2012

The limited liability company (LLC) has become one of the post popular business structures in the United States, but many people are confused about how it differs from a corporation.

Attorney, Kristy Phillips, states, Many people refer to a limited liability company as an LLC corporation. It is not a corporation in any form. The C in LLC stands for company not corporation.

The confusion comes from the taxation of the limited liability company more than it does from the legal structure. When the limited liability company was created in 1977 by the Wyoming legislature, they established the legal rules, but they couldnt determine the tax rules. As a result they petitioned the IRS to determine how their new business structure would be taxed.

It took until 1996 for the IRS to determine how they would tax the new legal structure known as a limited liability company. Rather than creating a new section of the IRS Code to tax LLCs, the IRS after almost 20 years decided the taxpayer could choose how their LLC was to be taxed.

The IRS decided to simply have the LLC check the box and decide how it was to be taxed. If the limited liability company has only one owner (member), it can be taxed as a sole proprietorship. The IRS considers this to be a disregarded entity, because the LLC doesnt actually file any tax forms. All of the profit or loss in the company is simply reported on the members Schedule C on their 1040 income tax return.

A limited liability company with two or more members can be taxed as a partnership. An LLC taxed as a partnership doesnt mean that the liability laws of a partnership, where each partner is liable, apply to the LLC. It only means the LLC has the taxing structure of a partnership, explains Phillips.

An LLC can be taxed like a corporation, either under Chapter C of the IRS Code or under Subchapter S of the code. Either a single member LLC or a multiple member LLC can make the election to be taxed under Chapter C or Subchapter S. Because an LLC can choose the tax structure of a corporation, it is often called an LLC corporation. However, the terminology of an LLC corporation is wrong and shouldnt be used.

People really misunderstand the connection or non-connection between a limited liability company and a corporation, says attorney Jonathan Cavender. A limited liability company is a legal structure which has a lot of similarities to a corporate structure, but is very different. The confusion comes in the fact that the limited liability company can be taxed under the same tax codes as a corporation, he explained.

The tax elections are made by filing with the IRS. First the company needs to get an EIN (Employer Identification Number) and then tell the IRS how it wants to be taxed. Note that if the LLC is being operated as a disregarded entity, there is no need to get an EIN. The single members Social Security number will be used for all of the companys reporting.

The limited liability company documents need to authorize the tax choice. Specifically, the LLC operating agreement needs to be written to authorize the tax choice and then define what the company can and cant do to minimize taxes, states Phillips.

According to Phillips, The LLC operating agreement should be somewhere between 20 and 30 pages long. She says, ?most are only 5 pages long and that?s a real problem.? She has also agreed to share her free operating agreement template either as a comparison or to use when forming an LLC.

Source: http://www.emposoft.com/limited-liability-company-structuring-requires-tax-choices/

focus on the family packers vs giants giants score aaron rodgers 2012 golden globe nominations houston texans houston texans