Small Business Tax Benefits for Limited Liability Corporations

There are several small business tax benefits available for limited liability corporations. Here are a few of the benefits that limited liability corporations can take advantage of.

Pass through Taxes

With the limited liability corporation, perhaps the biggest tax advantage is the ability to pass everything through to the owners. With this type of corporation, all of the profits or losses are passed directly on to the owners of the company. The owners will then file this profit or loss on their individual tax returns. With other types of corporations, such as a "C" Corporation, the business itself will have to pay taxes on its earnings. Then, the profit will be passed on to the shareholders. At that point, the shareholders will also have to pay taxes on the money. This provides a scenario in which double taxation is taking place. This takes more money away from the company and gives it directly to the government. With the limited liability corporation, the money is being taxed only once at the individual owner's marginal tax rate. This can be a substantial savings when you look at the big picture of the company and how much money is going to taxes.

If a corporation loses money for the year, this loss will also be passed onto the owners of the company. This loss can help offset income in other areas for the owners. Therefore, regardless of whether the company made or lost money, it can benefit the owner of the company.

No Proportionality

With other forms of corporation, everything has to be divided up in proportion to the percentage of ownership in the company. Therefore, if one of the owners in a "C" Corporation owns 60 percent of the company, she can receive only as much as 60 percent of the profit or loss for the year. With the limited liability corporation, there is no requirement of proportionality. Someone could own only 25 percent of the business yet receive half of the profits for the year. Therefore, you can decide to split up the profits or losses for the company in any way you choose. The IRS will not intervene regardless of how disproportionate the split is. This allows you to have more control over the company and how profits are paid out.

Corporate Debt

Another advantage that is available for limited liability corporations is the ability to include corporate debt on individual tax returns. By comparison, if you are in an "S" corporation, you will not be able to include corporate debt for your personal tax basis. Therefore, this presents you with a nice personal tax advantage that allows you to offset even more personal income.

Change Tax Basis

When a limited liability corporation changes ownership structure, it is allowed to change the tax basis of its assets. It can change the tax basis of assets to a fair market value, which will increase the amount of depreciation that can be claimed.