LLC Entity of Choice and Uses

When forming a new business, one should always ask: Why not use an LLC? In Wisconsin, for example over 80% of new businesses make choose the LLC. It is not always the correct choice and in fact in some cases it can not be legally used. One must consult local laws on this. But in the main, it is the correct choice. 

There are many ways to make the case for LLC’s. I have done so now since 1991 well before the legislation was drafted, introduced and passed in Wisconsin. I became chair of the State Bar committee responsible for drafting LLC legislation. Since its passage in 1993 and effective date of January 1, 1994, the use of it has grown to over 80% of new entities formed in Wisconsin.  I will post several documents and power points which make the case for LLC’s.

A summary history of federal income taxes is important to study and understand. This power point summarizes this information. Tax Slides 8.31.2010

The first document is a power point presentation which points out the non-tax factors for entity choice.BE – Non Tax Factors

The second document is another power point presentation which points out the tax factors for entity choice.BE – Tax Choices Entities

There are occassions to use corporations. When there is a consistent sizeable income levels for a sevice business, an S corporation is perhaps a good idea. Compensation to the employee/owners/shareholders can be split between regular wages and dividends. The dividends are not subject to social security and medicare taxes. This is a potential  tax savings of 15.3% on each dollar of dividends. (  6.2%  is for social security for the employee and employer; this is capped at $106,800 in 2010;  while the medicare and medicaid tax is 1.45% for employee and employer.)  To determine how much can be saved one must first know what total compensation that can be paid to each emplyee/owner.  For any amounts paid up to $106,800 which are split between wages and dividends, 15.3% can be saved on the dividend payments. For payments over $106,800 the medicare taxes can be saved of 2.9%. This should be carefully reviewed for each business.

C corporations are rarely advised unless the business has the potential to go public. Otherwise, the double tax penalty is a serious impediment to reducing the tax bills for the business.

On September 6, Wisconsin Technology News published an article I wrote on choosing LLC’s. It was an article rebutting two recent articles also in WTN which criticize the use of LLC’s for start-ups and tech companies. Suffice to say that I do not agree. You can find it at Wisconsin Technology News.

What was published was my abridged version of this article. What follows is the unabridged version. The Advantages of LLCs EBD Edits Long Version.

There was also an article in the Economist “The Eclipse of the Public Company” dated August 21, 2010. It emphasizes the decline of the public company. It emphasizes the use of limited liability partnerships as a growing choice among investors and hedge funds. To read it you can find it here at Eclipse of the Public Company. Enjoy! The Eclipse of the Public Company Economist Aug 21 2010