A Pennsylvania limited liability company “LLC” properly formed pursuant to Pennsylvania law provides its owners, known as “members” protection from personal liability and, therefore, is referred to as a limited liability entity.

Similar to an “S” corporation an LLC for both federal and state tax purposes is a “pass-through entity” such that its members avoid the “double taxation” of income associated with Subchapter “C” corporations. Unlike an “S” corporation federal “check in the box’ rules allow an LLC to elect for taxation purposes to be treated as either an “S” corporation (must also elect “S” status) or if such election is not made treated by default as a partnership for tax purposes.

Whether taxed as a partnership or “S” corporation an LLC member enjoys “pass-through” entity status and avoids the “double taxation” pitfall that characterizes the “C” corporation. A LLC provides a flexible entity structure and is not subject to many ownership restrictions imposed upon “S” corporations.

  • Where an LLC has only a single member, the entity is disregarded for tax purposes.
  • Despite being taxed like a partnership, the LLC provides its members with the same limited-liability protections associated with business corporations – there is no requirement that a member must be responsible for potential liability of the company.

Pros:

  • No personal liability for the company’s owners (referred to as “members”)
    • Commonly referred to as a “limited liability entity’
  • By default taxed as a partnership, income “passes through” directly to the members and is reported on their personal tax return
    • The company does not pay income tax (avoiding the double taxation pitfall associated with “C” corporations)
  • Ability to elect federal taxation as either a subchapter “S” corporation or default automatically to be taxed a partnership
    • In either case taxation occurs at the individual (Form 1040) level
  • Flexible governance and organizational requirements
    • No restriction on types of owners or creating varying member classes
    • Able to utilize multiple ownership classes with varying voting and income rights
  • Ability to allocate tax attributes (such as income or losses etc.) disproportionately among members to suit their individual tax situations
  • No annual meeting requirements to maintain entity structure limited liability benefits
  • Organizational process and documents less complex requirements to incorporate and no notice of formation publication requirements
  • Easy to convert to another entity such as an “S” corporation at a later date

Cons:

  • Subject to capital stock tax and state franchise tax
  • All earnings subject to self-employment tax
    • No taxable difference between member “wage” payments and company distributions to members
    • Impact dependent on projected revenues
  • Less formalities
    • May cause difficulties with transferability of ownership
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