The LLC Is the Best Business Structure for Small Businesses
The limited liability corporation (LLC) is the best business structure, for small businesses because it allows them to behave like a corporation when dealing with the public, but like an individual when dealing with the Internal Revenue Service (IRS). The corporate structure of the LLC provides the very important legal protection from claims against the owner’s personal assets, while the tax laws allow the LLC to choose a tax classification that is suitable for the business. To choose a classification, the LLC must file form 8832 with the (IRS) within 2 and a half months after registration.
In dealing with The IRS the LLC has choices about how to be classified for tax purposes. A single member LLC can choose to be classified as a sole proprietorship or a corporation. Classification as a sole proprietorship allows the business owner to report business transactions with the individual return on schedule C, avoiding the cost of preparing a separate business return. A multi-member LLC can choose to be classified as a partnership or a corporation.
The LLC provides an added level of flexibility in that the business can change its tax classification to suit the needs of the business and the owners. For example a single member LLC may choose the classification of sole proprietorship initially, when profits are small and there is no advantage to be classified as a corporation, but change its classification to a corporation at a later date when profits are larger, and tax avoidance strategies are needed.
There are some rules members of LLCs need to be aware of. Once the LLC is registered, the business owner has two and a half months to file form 8832 to choose its tax classification. After the LLC files the initial form 8832 choosing its tax classification, it can change that classification every 5 years. If form 8832 is not filed, the IRS will determine the tax classification of the LLC. In the case of a single member LLC, it will be classified as sole proprietorship and in the case of a multi-member LLC it will be classified as a partnership.
The structure of the LLC is perfect for a small business as it provides the business with credibility and the owners with legal protection from day one, but allows the business the flexibility of changing its tax classification with the IRS therefore taking the best advantage of the tax code.