The Big Tax-Saving Benefits of LLC Business Organizations

I like any business that has the opportunity to generate a neat million plus ongoing income. Who wouldn't want to have a piece of that action!

While you think you and your friend are the only partners in your business, you do have other silent but highly compensated partners who will share in your potential success. Let me introduce you to your new lifelong partner Uncle Sam!

One question that may make your decision easy is this: Do you want to pay your taxing partners once or twice on the same amount of profits every year? Most startup entrepreneurs would want to keep as much of their hard earned profits as possible by organizing as a limited liability company or "LLC", general partnership or "S corporation", rather than as a standard "C corporation."

Here's how it works. A limited liability company or LLC allows business profits to bypass traditional corporate taxes and pass through to the LLC's owners or "members." You would report your LLC-related income on your personal income tax return. Equally, you would be able to apply any startup LLC-related losses on your personal income tax return.

In contrast, business profits in a standard C corp are taxed by the federal government and again by most states. Then to the extent that you and your partner take out the profits in the form of dividends or bonuses, you have to pay Uncle Sam once again. That's brutal on the bank account!

Both LLC's and C corps provide owners with some limitations of liability. For example, if your business obtains debt without signing a personal guarantee, you and your friend would generally not be personally liability for missed payments. It's important to note that exceptions to liability limitations may exist in tort claims involving negligence or fraud.

Big concept entrepreneurs seeking angel or venture funding should just organize a C corp. Multiple rounds of venture funding often involve the issuance of several classes of common and preferred stock – which is easily handled in a C corp structure. Many sophisticated investors crinkle their noses at LLC's and won't invest until the structure is changed – at the entrepreneur's expense. Employee stock options are also easily administered in C corps.

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