Ronald J. Cappuccio, J.D., LL.M.(Tax)
Counsellor at Law
1800 Chapel Avenue, Suite 128
Cherry Hill, NJ 08002 USA
(856) 665-2121
E-mail: Ron@BusinessEsq.com
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Starting Your Business The Right Way! |
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. Limited liability companies then provide the
advantage of protecting its members from the liabilities of debts and obligations, similar to
corporate shareholders. It should be noted, however, that this limited liability has been
continuously eaten away, particularly in the area of environmental law, and it is not expected that
limited liability companies would fare any better. If a limited liability company is properly
structured, it will be treated as a partnership pass-through entity.
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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©2002
Ronald J. Cappuccio, J.D., LL.M.(Tax) All
Rights Reserved
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Corporation vs LLC?