Monday, April 28, 2008

The Problem With LLCs

If it walks like an LLC and talks like an LLC, it probably stinks (like an LLC).

For the majority of small business owners, all that an LLC delivers is higher setup costs, higher annual fees due to New York State, higher audit risk, and higher taxes.

Yet, so many people are forming LLCs these days.

Why? I chalk this craze up to misinformation. The two biggest culprits of this misinformation include uninformed websites touting LLCs and attorneys/accountants steering entrepreneurs towards the LLC so that they can charge higher setup fees.

For most small business owners, the S-Corporation still reigns supreme...significantly lower setup costs, significantly lower audit risk, lower annual fees due to New York State, and potentially significantly lower taxes.

If you are at the stage of determining which type of business is best suited for you, feel free to contact me for a free analysis of exactly how much tax you can save and how much lower your audit risk will be by forming an S-Corporation instead of an LLC.

If you have already setup an LLC and are now kicking yourself for doing so, cheer up. There is a three-step procedure that we use in order to petition the IRS to tax your LLC as an S-Corporation. We have been successful with 95% of the petitions we have filed. Taking this step is much cheaper, easier, and cleaner than shutting down your current LLC and setting up a new S-Corporation.


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1 comment:

James E. Clark, Esq. said...

Great post on LLC's. I think you are right with respect to the costs and tax benefits of forming an S-Corp.

However, as an attorney I will also look at a client's exposure to various forms of liability. Most clients are aware of how an S-Corp or LLC will protect their personal assets from business liability (i.e. preventing the piercing of the corpoate veil), but what about protecting business assets from personal liability?

Lets say the principal shareholder of an S-Corp. is sued on a personal matter outside the business and the creditor obtains a judgment against the shareholder personally. In enforcing that judgment, the creditor could sieze the shares of the S-Corp and force the sale of the business assrts to be made whole. However, if this same situation involved siezing the LLC interest, (as long as the LLC is properly structured as a partnership) the creditor would only be entitled to a "charging order." With a charging order, the creditor would be entitled to the proceeds to be made whole when the LLC is dissolved, but as long as it remains in business, the creditor can't reach the business assets.

The charging order is only available to entities taxed as a partnership. For this reason, an LLC is still worth considering . . .


Jim Clark

James E. Clark - Attorney at Law
57 West Main St, Suite 220
Babylon, New York 11702
T: 631-539-8889
F: 631-956-9114