Should I Form an LLC?

Should I Form an LLC?

Authored by Haynie & Company Partner Bernard Abercrombie, CPA.

One of the most commonly asked questions from clients, especially when starting a business, is about LLCs.  There seems to be a common belief that forming an LLC will allow for more tax deductions than not having one.  In truth, since most are solely owned businesses, the utilization of an LLC provides no additional tax deductions.

The reason is that solely owned, or husband and wife owned businesses, are generally considered Single Member LLCs and are treated as disregarded entities by the Internal Revenue Service.  As such, for federal tax purposes, they are treated as if they do not exist.

In many cases, there are still good reasons to form an LLC, but they are legally related.  The formation of an LLC can provide legal protection from creditors of the business from gaining access to personal assets in the event of a problem.  This extra layer of protection could prove invaluable, and an attorney can provide additional insight into the legal aspects of an LLC or other forms of business ownership.

However, there are options in choosing an alternative entity type. If a taxpayer with a Single Member LLC does nothing, the default entity type is the Disregarded Entity.  A taxpayer forming an LLC can elect to file as a C Corporation or as an S Corporation.  These two entity types can provide differing tax treatments than the Disregarded Entity.  Electing to file as a C Corporation is done by filing Form 8832.  Electing to file as an S Corporation can be done by filing Form 2553.  There are different rules on the required filing dates, so consulting a tax advisor as soon as possible is advisable.

The rules are a little different for a Multi Member LLC.  The default entity type for a Multi Member LLC, other than a husband and wife, is a Partnership.  Multi Member business owners forming an LLC have the same options to elect to file as a C Corporation or as an S Corporation as an alternative to the default treatment as a Partnership.

The tax rules related to the four different alternatives of a Disregarded Entity, C Corporation, S Corporation, and Partnership can be quite different. If someone is considering these options, Haynie & Company is here to help determine the most beneficial scenario for your situation.

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