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What you should know about LLCs

One of the single most important issues that a group of individuals planning on going into business together must address at the outset is selecting the proper business entity. In other words, they must decide whether to organize as a corporation, partnership or limited liability company, to name only a few.

While this might seem like a relatively straightforward matter, it's an extremely complex determination replete with a host of financial and legal considerations. In light of this reality, today's post will attempt to provide some much-needed clarity on limited liability companies, a popular entity choice among budding entrepreneurs.

What is a limited liability company?    

At its core, a limited liability company -- or LLC -- is a sort of hybrid entity in that it combines the tax treatment of a partnership and the limited liability component of corporations.

What exactly is this tax treatment?

The Internal Revenue Service does not view LLCs as separate tax entities, such that taxation is passed through to the owners of the LLC or its "members."

Indeed, members are responsible for reporting their respective losses and profits on their individual income tax returns.     

What exactly is this limited liability component?

In a corporation, the shareholders (i.e., owners) enjoy limited liability, meaning their personal assets are protected in the event the corporation is hit with a lawsuit or incurs debt. This same level of protection is extended to the members of an LLC.

Are there any other advantages to organizing as an LLC?

Another distinct advantage of organizing as an LLC is that it typically involves less registration paperwork and lower start-up costs. More significant, however, is that members are free to distribute profits as they please, taking everything from sweat equity and investments into consideration.

Are there any disadvantages to organizing as an LLC?

Perhaps the single biggest disadvantage of organizing as an LLC is that all members are considered self-employed in the eyes of the federal government. As such, each will need to pay self-employment tax contributions toward both Social Security and Medicare.  

Here's hoping the foregoing information has proven helpful. If you would like to learn more about this complex topic, another business entity or business formation in general, you should strongly consider speaking with a skilled legal professional.

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