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A relatively
new type of entity set up that combines the corporate structure
with the tax benefits of a sole proprietorship, partnership,
and S-corporation (discussed next), is the "Limited Liability
Company" or LLC for short. This entity structure is now available
in most states and the District of Columbia. The best thing
about the LLC is that it provides all the protection privileges,
which are available to a corporation, and also provides a provision
to be taxed as a sole proprietor or the partnership. The only
negative thing about LLC is that it still is a new corporate
structure and many things need to be tested as time passes.
But in general, it offers the best option available to an entrepreneur.
Another important feature is the fact that an LLC allows flexible
management; the members (as they are called in an LLC, as opposed
to stockholders in a corporation), may be active or inactive.
LLC also allows a foreign national to become a member (which
may not be available to an S-corporation, discussed next). Yet
another important feature that is available to an LLC is the
flexibility in allocating the ownership interest and therefore,
income and losses.
For federal taxation purposes, LLC has several options as how
the entity is to be taxed, such as:
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1. |
To be
taxed as a sole proprietor (if it is a single person
entity)
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2. |
To be
taxed as a partnership (thus avoiding double taxation)
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3. |
To be
taxed as a corporation (if that suits the stockholders) |
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4. |
To be
taxed as a foreign corporation (if a foreign person
or a foreign corporation is involved)
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At the
state level, taxation is murky, as different states
have different rules. Therefore, it is advisable
to check with your qualified accountant to discuss
taxation of an LLC at the state level.
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Advantages:
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LLCs provide a greater flexibility in management
and organization of the business |
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Just like a C corporation, LLC also provides protection
from lawsuits and judgments |
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Offers a wide menu of items to choose from when
dealing with federal income taxes |
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There is no restriction of having a foreign person
being member of an LLC |
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Greater
flexibility in allocating income and losses as well
ownership interest |
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Disadvantages:
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LLCs are still a new phenomenon in the US, and therefore,
the overall risk factors are unknown
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The rules are varying from state to state and most
of the states have a term limit on LLCs
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Setting up an LLC in another state (as a foreign
corporation operating in another state) may be difficult
because of different rules in each state
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