Nov 4, 2009
Should I form my company as a Limited Liability Company?
Whether or not to form a limited liability company, or LLC, is first and foremost a tax question. LLCs are treated as partnerships and are “pass through” entities federal tax purposes. As a pass through entity, the LLC itself does not pay federal tax on its profits nor does it get a deduction for its losses. The tax profits and tax losses are passed through to the owners of the LLC and are paid directly by them on their tax returns. In the case of a company that expects to produce large amounts of income, this arrangement eliminates the double taxation which occurs in a corporation. In the case of an ordinary corporation (a so-called "C" corporation), the corporation pays tax on its income and its stockholders pay tax when dividends are paid to them by the corporation. LLC's can be complex to form and complex to operate however. The overall cost of forming and operating an LLC may outweigh its tax treatment benefits. Another important consideration is that most venture funds cannot invest in LLCs for some important tax reasons. Thus, if you expect to obtain traditional venture funding avoid forming an LLC.
