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Limited Liability Company As Choice of Entity

Published: 15 March 2022

Dear Client, we are writing you at this time to explain the major reasons why it might be appropriate for your business to operate as a limited liability company.

Dear Client:

 

We are writing to you at this time to explain the major reasons why it might be appropriate for your business to operate as a limited liability company.

A Limited Liability Company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality can provide the owners with the best of both worlds.

Like the shareholders of a corporation, the owners of an LLC (called "members” rather than shareholders or partners) are generally not liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity's creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.

The owners of an LLC can elect under the check-the-box rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings are not subject to an entity-level tax; instead, they "flow-through" to the owners, in proportion to the owners' respective interests in profits, and are reported on the owners' individual returns and are taxed only once. To the extent the income passed through to you is qualified business income, you will be eligible to take the Code Sec. 199A pass-through deduction, subject to various limitations. In addition, since you are actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.

An LLC that is taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that is similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs are not subject to the restrictions the Internal Revenue Code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.

In summary, an LLC would give you corporate-like protection from creditors while providing you with the benefits of taxation as a partnership. For this reason, you should seriously consider operating your business as an LLC. Please give me a call at your earliest convenience so that we can discuss in more detail how use of an LLC might benefit you and the other owners.

Should you need additional information it will be our pleasure to assist you.


Sincerely,


Ruben Flores, Attorney & CPA

 

As requirement of the United States Treasury Regulations, you should be conscious of the fact that this notice has not been written to be used and it should not be used by the recipient to prevent penalties that could be imposed by U.S. Federal Law.

 

Ruben Flores
FGA Attorneys & Advisors
Country:
Texas, USA
Practice Area:
Corporate
Phone Number:
(210) 340-3800
Fax:
(210) 340-5200
FGA Attorneys & Advisors is dedicated to providing comprehensive corporate, tax, and immigration services to individuals and companies doing business in the U.S. and Mexico. Our firm is able to meet the diverse legal and tax needs of local, national, and international clients because we have an experienced team of attorneys and advisors with extensive experience in corporate, tax law, and cross border transactions. We are an international oriented firm with multilingual capabilites including English, Spanish, and Italian.

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