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LLC Tax
Advantages
The
essential advantage of a limited liability company is that it
provides pass-through
treatment without taxation at the entity level, essentially partnership
tax treatment, while shielding
members from personal liability. Multiple member LLC's are treated as a
partnership and file a US
Partnership Tax Return Form 1065. Single Member LLC's can be treated as
a Sole Proprietorship
and are taxed on the member's 1040 Schedule C.
General Tax
Classifications
LLC's can
elect to be treated as a
proprietorship, partnership or corporation by filing an election with
the IRS. Because a limited liability company is an unincorporated
business entity, the Internal
Revenue Service will not treat it as a corporation unless it has more
corporate characteristics
than non-corporate characteristics. The Entity Classification Election
filed with the IRS can
specify whether the LLC will be treated as a Corporation, Partnership
or Proprietorship. Because these fundamental rules have been
established over a long period of time where taxpayers
tried to classify entities as corporations, and
the Internal Revenue Service tried to compel
pass-through entity, the regulations favor
pass-through status. Treasury
Reg. §
301.7701-2 lists the following six
characteristics in determining whether a
business is subject to corporate taxation:
(1) Associates
(2) An
objective to carry on
business and divide the profits
(3) Limited
liability
(4) Continuity
of life
(5) Free
transferability of interest
(6)
Centralized management
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