Limited Liability Companies: Fact vs. Fiction

Most people, especially small business owners, are all too familiar with the concept of forming a corporation to protect and separate their personal assets from their business.

But fewer people are familiar with a relatively new corporate structure, the Limited Liability Company or “LLC”.  Chances are that if you are familiar with the idea of an LLC you may have heard many things that made you wonder whether or not an LLC was a viable option.

Just as with many other changes to or new approaches in the field of law, there is a lot of misinformation out there about LLC’s.

We’re here to set the record straight for you on the top 5 myths surrounding limited liability companies:

Myth #1 – S Corporations offer better tax treatment than LLC’s.

Not true and actually your company could be an S corporation and an LLC.    As the name implies, a limited liability company does exactly that – limits liability for the manager and/or members of the company, protects the business itself and provides a very simple management structure and fewer reporting requirements.  An LLC is not a tax structure.  It can have the same tax treatment as an S corp.

Myth #2 – Single-owner LLC’s have to be taxed as sole proprietorships.

Not true.  Your LLC can be taxed as a sole proprietorship, partnership, subchapter S corporation or even a subchapter C corporation.  It all depends on the tax issues your particular company is faced with.  When deciding on the appropriate corporate structure for your business, you need to consider how your company receives income.  Talk to your business attorney about the best structure for you.

Myth #3 – An LLC with two or more members must file a partnership tax return.

Not true.  Most of the time, members of a multi-member LLC will file as S corporations instead of partnerships because it will save them a substantial amount of money in self-employment taxes.  If you file as a partnership, all of the income is subject to self-employment taxes.

Myth #4 – The corporate protection is harder for creditors to break.

Not at all.  If you form a corporation your company is subject to some pretty stringent rules and requirements.  You have to hold annual meetings, keep minutes of the meetings, and file an annual report.  If a creditor can prove that your company hasn’t met these requirements, they can break through any protection the corporation may have offered; however, an LLC doesn’t have any of these requirements and provides much better legal protection for the members’ personal assets.

Myth #5 – It’s just too hard to change from a corporation to an LLC.

It’s actually fairly easy and inexpensive to convert to an LLC.  If you’ve already formed a corporation and want to form an LLC, you have to dissolve the corporation and then form the LLC (if you want to keep the same name for your company).  If you have already formed a corporation and an LLC, just merge your corporation into the LLC.

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The Parents Estate Planning Law Firm, PC

At The Parents Estate Planning Law Firm, we answer your questions at your convenience; we stay in frequent communication; and we meet to discuss changes in life circumstances and in the law to ensure that your assets are protected.

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