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LIMITED LIABILITY COMPANIES
Many entrepreneurs find both corporate and partnership forms attractive for different reasons. Forming a corporation limits personal liability for business debts and losses, while using a partnership form provides substantial tax advantages. Limited liability company laws combine these two advantages into one business form, simplifying the choice for many businesspeople.
Limited liability companies use the same tax treatment as partnerships. Unlike corporations, partnership and limited liability company profits and losses pass through to the individual owners. Instead of taxing limited liability companies at a higher corporate rate, the business income is imputed directly to the owners and is taxed at their individual income tax rate. Therefore, gains are taxed only once, instead of the double taxation imposed on some corporate earnings.
Example: Jack and Jill open a limited liability company, J&J Industries, LLC. In the first year, the company's profits are $20,000. Jack and Jill each take $10,000 out of the business, which is taxed as part of their individual incomes rather than as income for J&J Industries.
While limited liability companies allow their owners to benefit from lower tax rates, they also insulate owners from many legal risks. As with corporations, the limited liability company retains liability for business debts and obligations. Unless they assume certain roles, perform professional services on their own behalf or in charge of another (including for example, architecture, engineering, law, accounting, and medicine), or behave contrary to shareholder and public interests, the business owners do not take on personal responsibility for organizational liabilities.
Example: J&J Industries breaches a contract with a supplier, who files a lawsuit. J&J loses the lawsuit and the court orders the company to pay $100,000 in damages. J&J's assets are inadequate to satisfy the verdict, but the supplier cannot look to Jack and Jill to make up the deficiency. The supplier receives only that amount that the limited liability company is able to pay.
The tax and liability implications of limited liability companies are attractive, but competent legal advice should be sought in order to take full advantage of this business form.
Please contact us for further information.
Powell Trachtman Logan Carrle & Lombardo, P.C.
610-354-9700
www.powelltrachtman.com
