I got it from this website: Submitted by azalesky@aztfin… on Mon, 2016-03-07 09:55I got it from this website:  http://www.duganlopatka.com/resources/articles/published-articles/48-general-topics/217-llc-article?tmpl=component&print=1&page=What You Should Know About Limited Liability Companies

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Structuring businesses as limited liability companies (LLCs) makes sense for a variety of reasons. However, taking into consideration certain aspects of LLCs, they may not be the natural choice in all situations. Previously, where limited liability was a desired result, the only real options for an operating business were S corporations and C corporations. Although a limited partnership could be structured to provide limited liability, generally, they were not and still are not used extensively to run operating businesses.LLCs possess very desirable characteristics. They have the tax attributes of partnerships (which provide tremendous flexibility in the allocation of profits and losses), no double tax on the sale of assets and no potential dividend issues. On the other hand, they have the corporate characteristics of limited liability for their owners. For these reasons, LLCs make sense for a wide variety of family businesses. However, because the use of LLCs has certain negatives, they are not the natural choice in all cases. Many family businesses continue to choose the S corporation form notwithstanding the above advantages.Section 401(k) PlansFor reasons that defy rational explanation, the 401(k) plan of a partnership or LLC is different than a 401(k) plan for an employee owner of an S corporation. Both have the same limitations on salary deferrals and both contain family attribution rules. However, the 401(k) plan of an LLC or partnership treats employer-matching contributions as if they were employee deferrals for partners or members. Assume an owner of a family business normally defers the maximum amount into a 401(k) plan and also receives an employer match of another several thousand dollars. Under a 401(k) plan in a partnership or LLC, the employer match will be included with the elective deferral from the owner’s pay, and the maximum will be exceeded. Therefore, the owner can not receive the employer match that he or she would have expected to receive. In addition, even if the maximum amount is not exceeded, the employer match will be included as an employee contribution for the highly compensated owner for purposes of calculating the average deferral percentage. This may also result in a cutback in the amount of money that may be deferred on behalf of an owner of the company. The government is grappling with this dichotomy between partnerships, LLCs and S corporations. However, until the differences are resolved, the regulations under Sec. 401(k) will continue to cause this problem.Self-Employment TaxAnother difference between LLCs and S corporations is the self-employment tax. In S corporations, owners must pay themselves reasonable compensation on which FICA tax is withheld. Any earnings of the S corporation in excess of that amount are taxed as ordinary income not subject to FICA tax and not subject to self-employment tax. Ordinarily, if the company is a very high-earning company, the wages paid to the owner as reasonable compensation will be less than the total earnings of the company. Thus, a fair amount of income may be treated as non-FICA taxable and the combined 2.9% Medicare tax is not paid on that amount. In addition, with inactive shareholders, payroll is not justified and thus their income may be paid entirely in the form of distributions that are not subject to FICA or self-employment tax.An LLC, however, is different. Since it is treated like a partnership, any member who is active in the management of the business will be subject to self-employment tax on the full amount of income allocable to that member. Thus, FICA and Medicare taxes are not limited to the amount of reasonable compensation paid on a W2 form. For active members of the LLC, in a highly profitable situation, this can result in a significantly larger Medicare tax liability. In addition, where family members are inactive but do have some say in the business from time-to-time, harsh proposed regulations issued by the IRS could cause self-employment tax to be paid on the earnings allocable to those members even though they are relatively inactive with respect to the business. This can cause not only additional Medicare tax liability but FICA tax liability as well, and the amount involved can be significant. While the IRS studies its proposed regulations and future modifications are possible, the issue of selfemployment tax in LLCs will continue to be a sticky one.Payroll WithholdingAnother significant difference that an owner of an LLC will see in an S corporation is that an LLC member does not receive payroll in the form of W2 compensation. Instead, any amounts paid to a member for services rendered to the LLC are treated as guaranteed payments. Guaranteed payments show up on the individual’s Schedule K1 and the owner does not receive a Form W2. As a consequence, the owner must pay federal estimates quarterly. In some cases, this will be a benefit because the amounts paid to the federal government are paid at the end of each quarter whereas withholding from a W2 comes out each pay period. This may result in periods where the LLC owner has more money for investment purposes. However, if the S corporation shareholder did not pay salary ratably during the year, withholding taken out may be greater in later periods of the year than during earlier in the year. In this case, the LLC member paying estimates quarterly will find less money during the year for investment purposes. In addition, the owner may not be familiar with paying quarterly estimates and may find it difficult to have the discipline to do so. Because of this, some new LLC members must be aware of a potential change in the way they pay their federal withholding/estimated tax. This analysis applies equally to state tax, if any.ComplexityLLCs generally are more complex than S corporations in two ways. The first aspect is formation of the entity. Generally speaking, an S corporation is very simple to form. An LLC document is similar to a partnership document. If a standard boilerplate document is used, an attorney may be able to form an LLC for approximately the same cost as an S corporation. However, part of the appeal of an LLC is its flexibility in the allocation of income and losses. Consequently, few boilerplate LLC documents are being used in sophisticated family business situations.Thus, the LLC operating agreement generally takes some time to prepare, read and change according to the desires of the family business owner. This by itself should make forming an LLC somewhat more costly than an S corporation. Second, the taxation of LLCs mirrors that of partnerships. A partnership tax return is somewhat more difficult to prepare in many situations than an S corporation return. In addition, many items of income and expense are treated differently for an S corporation as opposed to an LLC.Finally, because items of income and loss are not rigidly allocated as in an S corporation, it is not as mechanical a process to prepare a Form 1065 for an LLC as it is to prepare a corporate tax return for an S corporation. When a family business is choosing between an S corporation and an LLC as an entity, the above items should be remembered before making the decision.Becky MiklBecky Mikl is a Manager for the accounting and consulting firm of Dugan & Lopatka, CPAs, PC in Wheaton, Illinois. In addition to her responsibilities as a member of the firm’s Tax Department, Becky is one of the firm’s primary tax referencers responsible for reviewing tax returns for accuracy before they are released to our clients and the IRS.As specialists for closely-held businesses, Dugan & Lopatka can help.  Give us a call at (630) 665-4440.

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