There are two major reasons to prefer an LLC over either a C or an S Corporation:
- Better Asset Protection, and
- Flexibility for Tax Elections.
The corporate veil gives you good personal protection from your business. But with corporations, it’s a one-way street. If you do something wrong in your personal life, it can have an impact on your corporation.
For example, you have too much to drink and cause a car accident where someone is injured. Your insurance doesn’t cover the damage claim, and you lose the court case. When the other side comes looking for assets to pay out the claim, your shares in the corporation are considered an asset that can be seized. Once a creditor has control of your ownership, they can force the corporation to liquidate assets. This is especially true if you are the only shareholder or you hold a 50% + ownership. The creditor simply votes the shares in a liquidation proceeding.
With LLCs, things are different. State LLC laws clearly state that your ownership in an LLC is not an asset that can be seized, nor may a creditor reach into your LLC to force liquidation or attach a claim to the LLC’s assets. A creditor may only place a Charging Order (which amounts to a lien) over your assets. That means that any net profit that would normally be paid to you will be paid to the creditor until your debt is satisfied. And, even though a creditor may control the profit from your LLC member interests, that creditor may not vote those interests. This allows you to retain control over the actions of your LLC.
An LLC gives you unparalleled tax flexibility and solid asset protection. It’s the best of both worlds.
The second advantage an LLC has over a corporation is unparalleled flexibility in taxation. An LLC, unlike any other formal business structure, can decide how it wants to be treated for taxes. If C Corporation taxation is beneficial, an LLC can be taxed like a C Corporation. It would become an “LLC-C”. If S Corporation taxation is a better deal, then an LLC can make that election instead, and become an “LLC-S”. If other tax classifications are better, like the passive income elections, for example, an LLC can also make those elections and become taxed as a partnership or as a sole proprietorship. So you’ll effectively receive all of the benefits of a corporation, along with the extra asset protection LLCs offer over corporations. It’s this double-shot that makes the LLC your business structure of choice. You may even find that an LLC-S is the ideal business structure choice for most of your new business ventures.
For more information on selecting the best tax structure, please see Smart Business Stupid Business.