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When you have valuable assets, significant costs or debt, or the possibility of someone getting hurt, a limited liability company (LLC) could help shield you from liability. Additionally, it can also help you with your taxes. For property owners, this business structure is commonly used to organize rental properties into separate LLCs with the goals of protecting personal assets.
A financial advisor could help you decide if an LLC is beneficial for tax and liability purposes, choose a tax classification and integrate it into your overall financial strategy.
An LLC is a business structure governed by state law. This means that the specific details differ across jurisdictions, although most (if not all) states share the same general principals. Along with S-Corps and partnerships, the LLC is a common business structure option for individual property owners or small group owners.
As with other business structures, an LLC allows you to operate a business as a legal entity independent of the owners and operators. The company can hold its own bank accounts, own its own assets and is independently responsible for any debts and liabilities. This allows owners to operate a business without being personally exposed to the associated risks and costs, as long as they keep their business and personal assets strictly separated.
A limited liability company is relatively easy to form. Among other reasons, this makes it popular for landlords and rental property owners. In fact, it’s common for owners to form a separate LLC for each individual property, allowing them to separate the costs, debts and taxes of each unit while centralizing the profits. This creates a relatively efficient overall business structure that allows you to collectively operate a series of businesses without burdening the entire organization with an outlier’s poor performance.
Generally, an LLC is taxed on what’s called a pass-through basis. This means that the company itself does not pay any taxes (LLCs that choose to be taxed as C corporations do pay their own taxes.) Instead, the business owner reports any income or losses on their personal tax returns and pays income taxes accordingly.
For an LLC with multiple members, the company does need to file an informational tax return with the IRS. This tells the tax agency how the LLC has divided its earnings among its members, to make sure that all income is reported accurately.
