As tax season approaches, naturally our firm receives more calls from business
owners with tax questions, however, tax questions come year-round.
All yearlong entrepreneurs ask, “How should I form my small business?”
After all, the format of a business not only impacts financial performance,
but it can either shield a business owner’s personal assets, or
it can leave them vulnerable to liabilities and lawsuits.
Since shielding assets is usually a priority for business owners, we are
going to focus this post on the Limited Liability Company (LLC), which
is one of the best ways to “wall off” a business owner’s
personal assets from the debts and other liabilities of their business.
Many startups are structured as LLCs and for good reason. LLCs offer some
of the positive attributes of partnerships, sole proprietorships, and
corporations, without some of the drawbacks of these entities. One of
the distinct advantages of an LLC – the business is not taxed on
its profits, as corporations (C-Corps) are.
With an LLC, the owner of the company reports the profits and loss on their
personal taxes returns, which is similar to the reporting requirements
of a general partnership or a sole proprietorship.
This process is referred to as “pass-through” taxation, and
business owners do not file corporate tax returns with LLCs. Instead,
the business owner reports their share of the company’s profits
and losses on their personal tax returns.
LLCs Don’t Have a Residency Requirement
LLCs do not have “residency requirements,” which means the
owner of an LLC does not have to be a U.S. citizen, nor do they have to
be a permanent resident (green card holder). As a matter of fact, the
absence of the residency requirement is one of the main reasons why so
many immigrant-owned businesses are structured as LLCs.
LLCs Limit Personal Liability
An LLC is a legal entity that is separate and distinct from the owner of
the company or the owners. Like the shareholders of a corporation, the
owner of an LLC is not personally liable for the company’s debts
or other legal liabilities.
While the LLC owner may lose the money they invested in the company, unlike
a general partner or sole proprietor, the owner of an LLC does not risk
losing their home or their personal bank account because they are shielded.
Other advantages of an LLC include:
- It’s less complex than other corporate entities
- There’s less paperwork involved than other corporate entities
- More flexibility in profit-sharing
- LLCs avoid double taxation
- LLCs allow entrepreneurs to run their own show
If you are interested in learning more about the benefits of an LLC, please
contact Rifkind Patrick LLC to speak with a Chicago
business attorney. We would be glad to discuss LLCs, and all other types of business
entities with you.