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Building Business Credit With a Limited Liability Structure

0 Comments | Nov 14, 2012 | Written by:

The Merits of the LLC

building business creditOne of the structures that is growing in popularity among small business owners is the Limited Liability Company. It’s a structure that is beneficial from both a tax and an asset protection standpoint.

Instead of shareholders, a Limited Liability Company (LLC) has members who either operate the LLC directly, or leave it to be managed by a separate group of Managers, or Managing Members.

Members and Managers are protected from liability in the same way that officers, directors, and shareholders of corporations are, which means that as long as they are acting legally and in the LLC’s best interests, they will not be found liable for debts or other liabilities incurred by the LLC.

The most that you can lose as a Member of an LLC is what you have put into it.

This structure offers four major advantages:

  1. Flow through taxation (i.e., the profits and losses flow through to the personal tax returns of the LLC’s Members), avoiding the double-taxation of C Corporations
  2. You can protect the assets of the LLC from lawsuit judgments against individual Members
  3. Protect your home and personal assets without losing the IRS homeowner deduction
  4. Estate-planning and succession to your children on a tax-free basis through gifting

 

It is important to note that as a Limited Liability Company, you do not pay separate taxes, and often don’t even file tax returns. Like an S Corporation, the net profits of an LLC are distributed to the Members in proportion to their individual ownership percentages.

Members must then declare and pay taxes on their individual share of the LLC’s net income, in the same way that S Corporation shareholders do.

It’s also an ideal structure for holding real estate and building business credit. You can receive very favorable tax treatment with capital gains, which makes it a very attractive structure to not only hold real estate, but other appreciating assets too.

LLCs also have a special legal protection in many states that corporations do not. If you are sued personally, and own shares in a corporation, those shares can be seized and sold by a judgment creditor. That means you could lose control over all of the assets in that corporation.

But an LLC, on the other hand, receives special legal protection in many states that prevents a creditor from seizing a Member’s ownership interests. The assets in that LLC stay safe. Not all states offer this level of protection, so consult with your legal advisor to see what the status of LLC law is in your state.

Because the federal government does not recognize LLCs for federal taxation purposes, each LLC is classified differently depending on the LLC’s structure. In some cases, your company can request how it would like to file the return. LLCs can only be classified as a corporation, partnership, or sole proprietorship, so you will need to complete Form 8832 to classify your LLC.

If you have been doing business up to now without a business structure, both the IRS and your state government default your business into either a Sole Proprietorship, or a General Partnership. Consider forming an LLC so you can start the business credit building process, and avoid putting your personal credit and assets at risk.

For a complete list of forms for Limited Liability Companies, visit the IRS.gov website. On a final note, be sure to consult with your legal and tax advisor to determine if this structure best serves the needs of your business.

[Photo Credit: Budget Building Tips]

Author:

Marco Carbajo is CEO of the Business Credit Insiders Circle, a step-by-step business credit building system providing credit recovery, lines of credit, business credit cards, trade credit, and funding sources for businesses.