Tax Relief – Limiting Tax Liabilities for LLCs

Move aside, partnership firms and corporations. Here come the LLCs!

A U.S. Limited Liability Company is an amalgamated business entity, which allows people to manage their business without putting their personal possessions at risk by limiting their liability and without the complications of being a corporation. A corporation is a company limited by shares, but an LLC does not issue shares and its owners are referred to as members. Its chief advantage is that it considerably restricts the liability of the owners.

It also constitutes a pass-through for the purpose of federal income tax, and is, therefore, an efficient tax relief mechanism. It is similar to a partnership and enjoys the same flexibility and dynamism in its management, minus the risk. LLCs are relatively new, but very popular these days. It may have one member or several depending on the state in which it is constituted. Individuals, other LLCs, and corporations may become members.

Single member LLCs may file a return in the status of the member and they have to pay self-employment tax on their profits. Multiple member LLCs file the return as a partnership firm and the members are liable for taxes on their share of the profits from the partnership. The members, however, pay self-employment tax only if they are paid by the LLC for their services.

It is useful to remember that conversion to an LLC may have tax implications, for example, when a corporation is converted into an LLC. In case of losses, your tax relief may be affected as the liability of the members for the debts of the LLC is limited. Correct information is the best guide in such situations, enabling you to obtain maximum tax relief.