Choosing Your Washington Business: LLC

Basic Considerations:

This series of article describes certain basic considerations and costs involved in forming a Washington business. Please note that choosing a business form should not be done in vacuum. Consideration as to how this decision may impact future alternatives is critical. For example, converting a LLC into a Corporation immediately before the business is acquired, rather than at an earlier time, may prevent the transaction from being tax-free.This article is only an overview, particularly as to tax issues and should not be substitute for a professional advisor’s analysis and recommendations based on your individual fact situations when establishing your business.

Selecting the Form of Business Organization:

No single factor is controlling in determining the form of business organization to select, but if the business is expected to expand rapidly, a corporation will typically be the best alternative because of the availability of employee incentive stock plans; ease of accommodating outside investment and greater long-term liquidity alternatives for shareholders. A corporation also minimizes potential personal liability if statutory formalities are followed.

The characteristics of a Business are described below, followed by an overview of other traditional forms of business organizations. Each of the following factors is described for comparison purposes: 1) statutory formalities of creation, 2) tax consequences, 3) personal liability of owners, 4) ease of additional investment, 5) liquidity, 6) control and 7) legal costs. Compare Corporation features here.

Limited Liability Company (LLC):

An LLC is a form of business organization is available in Washington, as well as many other states. An LLC is essentially a Corporation which is taxed like a Partnership, but without the S-Corporation restrictions.

An LLC has fewer statutory formalities than a Corporation and is often used for a several person consulting firm or other small business.

An LLC does not provide the full range of exit strategists or liquidity options as does a corporation.

It is not possible to grant stock option incentives to LLC employees in the same manner as a Corporation.

Effects of a Sale of an LLC:

When the assets of a business are sold with a pass thru entity like an LLC, the gains realized on the sale of the assets are taxed to the owners in proportion to their interests in the business. When Members sell their interests in an LLC, the proceeds are taxed as Capital Asset gains except for the sale of 'unrealized receivables and inventory' which are taxed as ordinary income.

S-Corp Election:

An LLC may elect an S-Corp Election to lower the Self Employment Tax (currently 15.3 up to 102,000) and 2.9 above the base level. The S-Election allows the the taxpayer to take an income tax deduction of one-half of all self-employment taxes paid.

For more information on LLC, contact a Kirkland Business Formation Attorney.