What is an LLC?
A limited liability company, or LLC, is an increasing popular entity choice across the United States. At least one reason for its rapid growth, is that as an entity choice, it is still relatively new when compared to Corporations and Partnerships. Generally speaking, an LLC's most notable characteristics are 1) Limited Liability for its owners, and 2) Pass through taxation.
Limitation of Liability
Quite simply, owners of the LLC are only exposed to liability up to the value that they have invested in the business. In other words, if you personally fund an LLC with $10,000, as the company operates, your $10,000, and any other assets owned by the LLC, are the only assets that could be attached to any form of Lawsuit or Bankruptcy action. Personal assets like IRA's, Homes, Cars, etc would not be at risk. There is one primary exception to the limited liability described above, and that is...
In a lawsuit against an LLC, the Plaintiff will usually try to "Pierce the Veil" of liabliity protection by arguing that the LLC was merely the "Alter Ego" of its owner. That is to say the business served no other purpose other than to serve the personal needs and desires of the owner. This is generally proven by examining the overall operation of the business. It is for this reason that an attorney astute in Business Law is vitally important to the entrepreneur that decides to start an LLC. We can help you avoid this potentially crippling pitfall.
Pass Through Taxation
Technically speaking, a single member LLC (single owner LLC) is a "Disregarded Entity" as pertains to the IRS Code. Effectively, that means that the income of the LLC is treated as belonging directly to its individual owner, and is not subject to any form of "Double Taxation". In this way, the income "passes through" the entity en route to being attributed to the owner.
However, if the company is owned by more than one person, it handles taxes in the same manner that a Partnership would. (See the IRS Regs here). Even in this situation, the income or losses are "passed through" to the partners. "Passed through" effectively means that any income, or losses are directly attributed to your Adjusted Gross Income (AGI) for the purpose of determining your federal and state tax liability.
Using A Venture Capital Fund
If you plan on starting a business with the hopes of attracting Venture Capital Funding, an LLC may not be your best bet. There are tax considerations at play that limit the LLC's effectiveness for this purpose. The good news is, an LLC is easily convertible to a Corporation tax free! If you have an LLC and think you might need to convert it to a corporation, Contact Us. We'd be happy to provide a free consultation to help you evaluate whether or not the conversion would be right for you.