Response-5

Meghan Campbell 

1 posts

Re: Topic 5 DQ 2

Limited Liability Companies are a combination of the legal and tax benefits of partnerships and S corporations (Anderson et al., 2020). Any company with two or more members can select to be taxed as a partnership or as an association, which is an unincorporated business taxed as a corporation (Anderson et al., 2020). As there are with each business structure, there are pros and cons of doing business as an LLC. One of the main advantages of choosing to be an LLC is that members have limited liability as they do with S corporations. Meaning that, they are only liable to their share of interest in the company and business debt cannot fall onto their personal assets/wealth (Anderson et al., 2020). Also, S corporation have “pass-through” taxation, just as partnerships and S corporations do. This could lead to a lower tax liability according to each member’s tax bracket. However, this could also be a disadvantage in the cases where shareholders are in a higher tax bracket because their tax rate may be higher than the corporate rate of 21%. This could potentially lead to a higher tax burden for the owners. Another disadvantage of LLC’s is the inflexibility with member change. In LLC’s owners are referred to as members and each member signs an operating agreement prior to the LLC formation. When members are ready to sell or transfer title, it often requires refiling and in some cases the LLC may need to dissolve and reform by signing a new operating agreement (Smith-Petta, 2021).

 

Anderson, K., Hulse, D., & Rupert, T. (2020). Pearson’s Federal Taxation 2020 Corporations, Partnerships, Estates, & Trusts. Hoboken, NJ: Pearson Education, Inc. Retrieved from  https://etext-ise.pearson.com/courses/5948317/products/147974/pages/47?locale=&platformId=1030&isTpi=Y&iesCode=j5cTPuosYM

Smith-Petta, L. (2021). Pros and cons of an LLC. Fit Small Business. Retrieved from https://fitsmallbusiness.com/pros-and-cons-of-an-llc/

Dristan Bahe  

2 posts

Re: Topic 5 DQ 2

A limited liability company (LLC) provides several perks for their owners, also known as members. These entities are formed under state law and provide corporate perks to members. The first of these benefits is the main advantage highlighted in its name, limited liability. Limited liability similar to that of a corporate liability shield, protects members from unlimited liability for business debts and liabilities, to the extent of their investments into the LLC. A second advantage is that an LLC is a pass-through tax treatment, allowing for earnings and losses to be passed onto their owners, potentially being taxed less than corporate tax rates and offsetting other incomes with the losses from the LLC (Schwidetzky, 2018).

Although an LLC business structure provides several benefits, there are also several drawbacks that can be anticipated. The pass-through can be a drawback, in that income to be taxed immediately includes earnings from an LLC business, whereas with a corporation, similar earnings are taxed only when they are distributed as dividends to shareholders. Additionally, there is potentially a lack of authority on employment law treatment, whereas LLP partners are eligible to “have a mandatory retirement age”, though not for employees (Schwidetzky, 2018).

 

Reference:

Schwidetzky, W. D. (2018). The pros and cons of LLCs. Journal of Accountancy. Retrieved from:  https://www.journalofaccountancy.com/issues/2018/dec/llc-pros-and-cons.html