Small business advising - Botwinick & Company LLC

Choosing the right legal structure for your small or medium-sized business is a crucial decision that can significantly impact your tax obligations, personal liability, and overall business operations. For many entrepreneurs, forming a Limited Liability Company (LLC) offers a blend of advantages, making it a top choice. Whether you’re just starting out or looking to restructure your business, an LLC provides the flexibility and protection that many small and medium-sized businesses need.

What is an LLC?

A Limited Liability Company (LLC) is a hybrid business structure that combines the liability protection of a corporation with the tax benefits and flexibility of a partnership. Unlike corporations, which may face double taxation, LLCs are typically taxed only at the personal level, helping to simplify tax filing and reduce tax burdens.

Benefits of Forming an LLC for Your Business

Limited Personal Liability
One of the primary reasons many business owners choose an LLC is the protection it offers. The owners of an LLC, known as members, are typically not personally liable for the debts and liabilities of the business. This means your personal assets, such as your home or individual investment accounts, are protected from any lawsuits or creditor claims against the company. This level of protection is much greater than what is provided by partnerships, where general partners are personally responsible for business debts.
Flexible Taxation Options
LLCs offer flexibility in how they are taxed. By default, an LLC can be taxed as a sole proprietorship (if it has one owner) or a partnership (if it has multiple owners). Additionally, LLCs can choose to be taxed as an S corporation or C corporation under the “check-the-box” regulations. This allows LLC owners to enjoy the benefits of pass-through taxation, meaning business income flows through to the owners’ individual tax returns, avoiding double taxation at the entity level.

For businesses that qualify for the Qualified Business Income (QBI) deduction, LLC members may also be eligible to deduct up to 20% of their business income, depending on specific IRS regulations and limitations.
Operational Flexibility
Unlike S corporations, which have restrictions on the number of shareholders (no more than 100) and only one class of stock, LLCs are not bound by such limitations. This makes LLCs particularly attractive for businesses looking to offer varying ownership interests or bring in a diverse set of investors without having to adhere to rigid tax code regulations.
Tax Deduction Opportunities
If you actively manage your LLC, you can deduct your share of any business losses on your individual tax return. This can help offset other forms of income, allowing you to potentially reduce your overall tax liability. Furthermore, LLCs can offer special allocations of profits and losses to different members, providing more flexibility in profit-sharing arrangements compared to S corporations.

Electing the Right Tax Classification

LLCs offer flexibility when it comes to tax classification. You can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on what works best for your business. For many small business owners, the default classification as a partnership (for multiple-member LLCs) provides the best balance of liability protection and tax savings.

If your LLC is taxed as a partnership, all profits and losses are passed through to the owners, allowing them to report this income on their personal tax returns. This simplifies the tax process and reduces the risk of double taxation.

Why Choose an LLC Over Other Structures?

For many small to medium-sized businesses, an LLC provides the ideal combination of liability protection and tax flexibility. Unlike corporations, LLCs don’t face the same ownership and management restrictions. Additionally, LLCs allow for profit-sharing arrangements and flexible distributions, making them a more versatile option for business owners looking to attract investors or share profits with employees.

Explore Your Options

When deciding whether an LLC is the right choice for your business, it’s essential to evaluate all available options. Every business has unique needs, and state regulations for LLCs can vary. At Botwinick, we specialize in helping small to medium-sized businesses navigate the complexities of business structures, tax obligations, and legal considerations.

Contact Botwinick for Expert Advice

An LLC may be the right fit for your business, but it’s important to review your specific situation with a professional. At Botwinick, we offer expert consultation services to help you determine the best structure for your business needs. Contact us today to learn more about how forming an LLC can benefit your business and protect your personal assets.

By focusing on the flexibility, liability protection, and tax benefits, an LLC might be the perfect structure to support the growth of your small or medium-sized business.

Are you considering purchasing a business that will have one or more co-owners? Or do you currently own such a business? If so, implementing a buy-sell agreement is a crucial step. A well-drafted agreement can offer the following benefits:

Transform your business ownership interest into a more liquid asset
Prevent unwanted ownership changes
Avoid complications with the IRS

Agreement Basics

There are two primary types of buy-sell agreements: cross-purchase agreements and redemption agreements (sometimes referred to as liquidation agreements).

Cross-purchase agreements are contracts between you and the other co-owners. Under this agreement, if a triggering event such as death or disability occurs, the withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners.

Redemption agreements are contracts between the business entity and its co-owners. In this arrangement, the business entity is obligated to purchase the withdrawing co-owner’s ownership interest if a triggering event occurs.

Triggering Events

You and your co-owners can specify which triggering events to include in your agreement. Common events to consider are death, disability, and retirement at a specified age. Other events, such as divorce, can also be included based on your preferences.

Valuation and Payment Terms

Your buy-sell agreement should clearly outline the method for valuing business ownership interests. Common valuation methods include a fixed per-share price, an appraised fair market value, or a formula based on earnings or cash flow multiples.

Additionally, the agreement should specify how payments will be made to withdrawing co-owners or their heirs under various triggering events.

Life Insurance to Fund the Agreement

The death of a co-owner is often the most significant and catastrophic triggering event. Life insurance policies can serve as the financial foundation for your buy-sell agreement.

In a simple cross-purchase agreement between two co-owners, each co-owner purchases a life insurance policy on the other. If one co-owner dies, the surviving co-owner collects the insurance proceeds and uses them to buy out the deceased co-owner’s interest from the estate, surviving spouse, or other heirs. The insurance proceeds are generally free from federal income tax, provided the surviving co-owner is the original policy purchaser.

For arrangements involving more than two co-owners, the process can become complex, as each co-owner must buy life insurance policies on all the others. In such cases, using a trust or partnership to buy and maintain one policy on each co-owner can simplify the process. Upon the death of a co-owner, the trust or partnership collects the insurance proceeds tax-free and distributes the cash to the remaining co-owners, who then fulfill their buyout obligations under the cross-purchase agreement.

For redemption buy-sell agreements, the business entity purchases policies on the lives of all co-owners and uses the insurance proceeds to buy out deceased co-owners.

Ensure your agreement specifies that any buyout not funded by insurance proceeds will be paid through a multi-year installment plan. This provides the remaining co-owners with the necessary time to generate the required funds.

Certainty for Heirs

For many business co-owners, the value of their business share constitutes a significant portion of their estate. A buy-sell agreement guarantees that your ownership interest can be sold by your heirs under terms you approved. Furthermore, the price set by a well-drafted agreement establishes the value of your ownership interest for federal estate tax purposes, thereby preventing potential IRS disputes.

As a co-owner of a valuable business, having a comprehensive buy-sell agreement in place is essential. It offers financial protection for you, your heirs, and your co-owners, while also minimizing IRS complications regarding estate taxes.

Buy-sell agreements are complex and should not be handled as DIY projects. Contact us to assist you in setting up a robust buy-sell agreement.

Why An LLC Might Be The Perfect Choice For Your Small To Medium-Sized Business