Wondering what the right structure is for your new or growing small business? A limited liability company (LLC) can be a great option—especially for protecting your assets. Here’s what you should know.

LLCs- The Basics

An LLC or limited liability company is an entity structure in which members of the company are protected from being personally liable for the company's debts and liabilities. The LLC business structure combines the pass-through taxation of a partnership with the limited liability of a corporation.

The benefit here is that if the business runs into financial difficulties, your personal assets are typically safe, as opposed to a partnership where owners can be held personally responsible for business debts.

What are the key tax considerations?

By electing under what’s called “check-the-box” rules, LLC owners have the option to have the entity treated as a partnership for federal tax purposes, which provides several benefits.

With this election, partnership earnings bypass the entity level tax and are instead directly allocated to the owners (sometimes called the “flow-through” option). Each owner receives a share of the profits based on their ownership percentage, and this income is reported on their personal tax returns and is only taxed once.

You are eligible (with limitations) to take the Section 199A pass-through deduction, to the extent the income passed through to you is qualified business income. It’s important to note that as of now, the pass-through deduction is available only through 2025.

You will also be able to deduct your ratable shares of any losses the business generates, since you’re actively managing the business. By doing so, you can shelter other income as a result.

Why choose LLC over S corp structure?

S Corporations benefit from many of the same tax benefits as partnerships. Namely, all of their profits and losses are passed through pro rata to the owners on their personal income tax returns. The downside, of course, is that S Corporation owners must pay their share of the company’s tax bill personally even if they receive no cash distributions for the tax year.

Using an LLC over an S corp is attractive to many because an LLC that’s taxable as a partnership can allocate special tax benefits to specific partners.

Additionally, LLCs are not subject to S corp restrictions about how many owners and types of ownership interests you can have.

Wondering how you should structure your small business? We can help guide you in the right direction.