How to Understand the Tax Advantages of a Limited Liability Company

Posted by Anonymous , 9/5/2007 Tags:UnderstandTaxAdvantagesLimitedLiabilityCompany
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How to Understand the Tax Advantages of a Limited Liability Company

Introduction

Limited liability companies have achieved popularity because they shield the personal assets of its members from personal liabilty. They also offer tax advantages. Follow these steps to learn what they are.

Instructions

Difficulty: Moderately Easy

Steps

1

Step One

Contact a tax attorney, or the Small Business Association's legal council, to set up a meeting with all of the members of your company. You can understand the tax advantages of becoming and LLC in an hour or two.
2

Step Two

Discuss openly where you plan to take the business. If you think you will be quite profitable and would benefit from a corporate tax structure, you might consider an LLC.
3

Step Three

Consult with your attorney to decide if you want to become an LLC.
4

Step Four

Determine whether you and the other members wish the company to be taxed as a corporation. You will need to fill out IRS Form 8832, known as the Entity Classification Election form, and check the box indicating taxation as a corporation.

Overall Tips & Warnings

  • If funds are limited and the idea of hiring a lawyer sounds expensive, consult your local Small Business Administration office (see Resources below). The SBA often offers pro bono legal advice for small businesses, as well as printed materials, a helpful Web site and ongoing seminars regarding small businesses.
  • As in any industry, buzzwords and buzz concepts in business are never a one-size-fits-all solution. The limited liability company structure does offer what some might consider tax advantages in some cases, but it's crucial that you understand all the caveats.
  • A limited liability company is neither devoid of all liability nor a tax-free haven. In fact, the structure can be more complex and expensive to set up than a standard sole proprietorship or partnership, and many states charge a franchise tax for LLCs, effectively making them pay for the benefit of running a limited-liability business structure in that state.

Overall Things You'll Need

  • Consultation with a tax lawyer familiar with small businesses
  • Computer with Internet access
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