5th Aug 2014

Occasionally we get a panicked call from a client who tells us that their friend of a friend’s financial advisor was horrified at that party to find out they had a LLC (limited liability company) and not a corporation. Didn’t they know LLC’s aren’t real businesses and won’t protect you from liability? We then carefully explain to our client that this isn’t so, never has been so, and the most important thing is how you conduct your business, just the same as with a corporation. Being a “disregarded entity” for tax purposes just means that income is taxed to the owners, not that the entity itself has no legal meaning for liability and other purposes.

Even the IRS has had to squelch this attitude among its own agents. In Chief Counsel Advice 201430013, whether or not a LLC is to be considered a subsidiary or separate company is based on the facts and not merely on the business being a LLC. The facts used to determine if the LLC is a separate business are the same for any related entity: are books kept separately, does each entity have its own employees, are assets maintained separately, are the entities performing the same business function, etc. In other words, LLCs are to be treated the same as any other business entity and not to be disregarded as a separate business just due to its informal nature and flow-thru tax status.

Despite having been around internationally for more than 100 years and used in the US since the late 70’s, some have been slow to accept LLCs as fully independent entities. There has been a push to fully integrate LLCs into the business world and educate the nay-sayers on how a LLC works. It is unfortunate that we still have those friends of a friend out that giving their opinion without any real idea of what a LLC is and how it works.
LLCs are more popular than ever before. The combination of less formality with liability protection and choice of taxation (s-corporation or partnership/sole proprietor) makes this the clear choice for many business owners. Call us today if you think this may be the time to start your LLC.

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