Gross Revenue Tax
(Equal to or over) (Not over) (The fee is)
$250,000 $499,999 $900
$500,000 $999,999 $2,500
$1 million $4,999,999 $6,000
$5 million and over: $11,790
4) Profit and Loss — This is a tax concept and does not necessarily relate to cash. Assume that a startup S corporation borrows $50,000 to buy equipment, which is depreciated over five (5) years so that the corporation obtains a $10,000 tax deduction in its first year. In the same year it generates $100,000 in cash, and assuming no other expenses at the end of the year it pays off the $50,000 loan and distributes $50,000 to the shareholders. The result is that the corporation will pass through to the shareholder $90,000 of taxable profit but there will only be $50,000 of cash distributed.
Advantages
Typical benefits of operating as an LLC include:
- Owners (called members) protected from personal liability for debts of the business
- Members can participate in management and still gain personal liability protection
- Partnership taxation — no double taxation, flexible allocations, few restrictions on ownership
- Can operate most kinds of businesses
How Does an LLC Compare to an S Corporation?
Like an LLC taxed as a partnership, an S corporation (a corporation that elects to be taxed under the provisions of Subchapter S of the Internal Revenue Code) is also a pass-through entity. Thus, except in certain special situations, an S corporation pays no federal income taxes. The corporation’s shareholders report their pro-rata share of corporate income, loss, deductions and credits on their own federal income tax returns. Unlike an LLC, however, an S corporation does not have the flexibility to make special allocations of these items.
The tax law places a number of restrictions on S corporations that may make electing S status unworkable for some businesses.
How Does an LLC Compare?
Limited Liability:
LLC – Yes
Corporation – Yes
S Corporation – Yes
Partnership – No
Limited Partnership – Only for limited partners
Federal Income Tax on Equity:
LLC – No
Corporation – Yes
S Corporation – No (some exceptions)
Partnership – No
Limited Partnership – No
Double Taxation:
LLC – No
Corporation – Yes
S Corporation – No (some exceptions)
Partnership – No
Limited Partnership – No
Allocations of Income/Expenses:
LLC – Yes
Corporation – No
S Corporation – Yes (pro rata only)
Partnership – Yes
Limited Partnership – Yes
Ownership Restrictions:
LLC – No
Corporation – No
S Corporation – Yes
Partnership – No
Limited Partnership – No
A Comparison of Commonly Used Terms
Although the precise legal definitions of these terms vary, they equate to one another in a very general sense as follows when used in the context of a limited liability company, corporation or partnership.
Who Owns the Business?
LLC: members
Corporation: shareholders
Partnership: partners
What Is Owned?
LLC: membership
Corporation: share
Partnership: partnership
Who Manages the Business?
LLC: managers or members
Corporation: board of directors and officers
Partnership: general partners
Document Creating the Entity:
LLC: articles of organization (in most states)
Corporation: certificate of incorporation
Partnership: partnership agreement or certificate of limited partnership
Agreement Detailing Specifics About Rights, Responsibilities, etc.:
LLC: operating agreement
Corporation: bylaws; shareholders’ agreement
Partnership: partnership agreement
What Are the Potential Disadvantages of Operating an LLC?
Because the LLC is a relatively new form of business organization in the United States, it is as yet largely untested in the courts. The lack of established case law and uniformity may be viewed as possible disadvantages. Also, some tax issues remain unresolved.
Conclusion
The limited liability company is a welcome addition to the business organization menu that brings with it new planning challenges and opportunities. As use of the limited liability company becomes more widespread, we expect that most of the unanswered questions about it will be wholly or partly resolved. In turn, new issues may emerge.
As always, my firm is prepared to assist you in evaluating the best alternatives for you and your business.
This is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that it does not constitute legal, accounting or other professional service. If expert assistance is required, the services of a competent professional should be sought.