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
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