Choosing the proper entity for your business
(Part 4 of 5)
LIMITED LIABILITY COMPANY (LLC) is a hybrid that combines the pass-through attributes of a partnership with the limited liability of a corporation. An LLC with more than one member is taxed as a partnership (or as a corporation if not organized properly). The owners are called “members” who hold “interests” and are governed by an “operating agreement.”
A. Advantages:
1. The liabilities of members are limited to their investments in the LLC.
2. No double income tax. No double tax on liquidation.
3. A Limited Liability Partnership (LLP) for professionals allows protection from claims involving the wrongful acts of other partners (vicarious liability).
4. Can specially allocate profits and losses.
5. A member contributing appreciated assets to an LLC in exchange for membership interest is not required to recognize gain on that exchange.
6. Distributions of appreciated property from an LLC are generally received without gain.
7. Receipt of an interest in an LLC for a profit interest is generally not taxable.
8. It is not subject to accumulated earnings tax, personal holdings tax, or alternative minimum tax.
9. It is not required to maintain certain formalities such as corporate minutes.
10. The basis of a member’s interest can be increased by the member’s share of LLC debts.
B. Disadvantages:
1. California LLCs pay additional annual fee based on gross receipts. (This is the main reason why I seldom recommend LLCs for small estates). The annual fee increased every year and has doubled since its introduction. It is now permanently set at $900/2500/6000/11790 for gross receipts of $250K, $500K, $1M, and $5M.
2. A member’s net earnings are subject to self-employment tax, whether distributed or not.
3. Loss from the sale of LLC interest is a capital loss (limited to $3000 per year).
4. An LLC will be constructively terminated if 50 percent or more of total interest is sold or exchanged within 12 months.
5. Disassociation events such as death, retirement or bankruptcy dissolve the LLC unless all remaining members consent to reinstate the entity.
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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies. The firm celebrates its 38th anniversary in 2015.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in 704 Mira Monte Place, Pasadena, CA 91101. He has 50 years of experience in accounting, consulting, and tax work.
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The Firm proudly welcomes Arlene Al-os in 2015. She obtained her bachelors of Science in Accountancy from Mindanao State University and MBA from Ateneo de Manila University. She teaches intermediate accounting at UCLA and was a professor of Economics at Asia Pacific College. She has over 15 years of experience including member firms of KPMG and BDO Seidman accounting firms.
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Our readers may call (626) 744-0200 or email tax questions to [email protected]. Please visit our website for about 300 tax tips at www.victorsycpa.com.
