The Limited Liability Company (LLC) is a relatively new form of business organization. An LLC is used for members to obtain the same advantages of limited liability regularly found in corporate entities. At the same time, an LLC avoids corporation income tax rules. All 50 states and the District of Columbia have adopted LLC statutes.
The LLC has also become an amazingly popular entity when doing business. It is extremely flexible and can provide a variety of different ways for investors to work together. Moreover, it is taxed as a partnership and its income and losses “flow-through” to the partners to create only one level of taxation. Although it has become a very common form of doing business, care must be given to various unexpected tax consequences, most noteworthy is that of the “self-employment tax.” It is also important to note that the Self-employment Tax does not apply to rents, dividends, interest, capital gains, etc. Thus, the LLC becomes a perfect fit for a long-term rental real estate.
Another reason for the use of the LLC is that any losses incurred by the entity will be passed through and deductible by the members under the partnership rules, provided the LLC is classified as a partnership for income tax purposes. No such pass-through is permitted in the case of a C Corporation.
From an estate planning standpoint, a major advantage is that upon the death of a partner or member, the partnership or LLC may elect to adjust the basis of its assets to fair market value, to the extent of the decedent’s interest.
Finally, an LLC may operate as a Single-Member entity and thus not be required to file a separate tax return from that of the owner, whether an individual or entity. If the LLC is owned by 2 or more individuals or entities, it must file a separate annual tax return under IRS Form 1065.