How is an LLC treated by the IRS?

| Mar 16, 2021 | Business And Commercial Law

One of the most common and popular business structures in Utah is the limited liability company, also termed as an LLC. While there are multiple operational benefits, one reason they are established is for taxation purposes. The company can have as many members as necessary, and can even include other corporations as members. The basic advantage is that they can be set up as separate entities with respect to tax burdens, and each member can be assigned a tax liability based on their particular income within the company.

Tax advantages of an LLC

A limited liability company can be set up in a variety of ways. Some are actually single-member companies that can choose to be treated as a type of corporation establishing the LLC as a separate entity. A business formation that does not make this choice is considered a “disregarded entity” by the IRS. However, most LLC structures include two or more parties and are essentially pass-through structures when all activity is assessed for tax liability. The LLC is not assigned income tax liability, instead transferring those responsibilities to the members who are paid through the company.

Asset protection through a LLC

Another primary purpose for establishing an LLC is the protection of personal assets in case of a lawsuit. Operating as a separate entity when conducting business, the actual defendant in any lawsuit will in most cases be the LLC instead of the individual members. This can be an advantage for partnerships involving several individuals who all operate under the same company name. A limited liability company can hold separate assets, such as stocks, but tax burdens are passed on to the individual members. Lawsuits brought against the business will be paid with LLC entity assets if the legal action is valid.

Entrepreneurs should consider establishing an LLC as opposed to operating under a personal Social Security number for tax purposes. Personal assets cannot only be exposed to attachment following a lawsuit, tax liability can be controlled and even reduced when the company is managed effectively. And, this is especially a concern for new start-up companies established by multiple individuals.