LLCs generally work best for:
- Businesses with a limited number of owners, that are actively up and running. At about 35 owners of the business, at a maximum, the logistics of making collective business decisions are manageable.
- New small businesses. Sometimes, new businesses want to pass early-year losses along to it’s owners to deduct against their other income, which may be a salary earned working for another company or income earned from investments.
- People or business owners who have been considering forming an S corporation. S corporations provide limited liability protection to its owners and allow profits and losses to be taxed at individual shareholder rates, just like LLC’s. But these benefits come at a pretty high price: S corporations are significantly restrictive and a business can inadvertently lose its eligibility.
- Existing partnerships. Only the LLC provides partnership-style pass-through tax treatment of business income while covering all of its owners, not just limited partners as in a limited partnership, from personal liability for business debts.
- Businesses planning to hold property that will appreciate, as in real property. C corporations and their shareholders are subjected to a double taxation on appreciation when assets are sold or liquidate. Taxation occurs at both the corporate and individual level. S corporations that were originally organized as C corporations may also be subject to double tax on gains from appreciated assets. There can also be a penalty tax on passive income, which is money from rents, royalties, interest, or dividends, if it gets too high. Because the LLC is a true pass-through tax entity, it allows a business that holds appreciating assets to avoid double taxation.