LLC and LLP issues for small, privately owned businesses.

• Author: DiGiantommaso, Robert M.
• Position: Limited liability company, limited liability partnership

One of the most important decisions a small business owner makes is choice of entity. From the instant he or she decides on a business venture, entity selection is critical.

To assist these clients, tax advisers need to address every form of business entity available--sole proprietorship, general or limited partnership, limited liability company (LLC), limited liability partnership (LLP), S corporation, professional corporation and C corporation. This discussion should included tax, nontax, accounting and recordkeeping issues, with consideration of Federal, state and local regulations for each type of entity.

Because of the increasing use of LLCs and LLPs by small, privately owned businesses, this item (1) provides general guidance for clients who use--or are thinking of using--these business forms; and (2) discusses some of the common problem areas.

Tax advisers should be familiar with the LLC and LLP rules, so as to advise clients on their advantages and disadvantages. Because LLCs and LLPs are governed by different laws, rules and regulations, practitioners need to analyze how each entity affects contributions, loans, distributions, withdrawals and other potential business activities.

What Is an LLC?

An LLC is a business entity organized under state law. Every state and the District of Columbia has LLC statutes. An LLC is made up of members, not partners. The managing member is responsible for the company's operations. LLCs provide the protection of a corporation and the flexibility or- a partnership. They protect their members from entity-level liabilities and claims, while allowing them to allocate and distribute profits and losses under various economic standards. In most states, a business can be owned by a single-member LLC (SMLLC).

An LLC is taxed as a partnership unless it elects to be taxed as a corporation, by filing Form 8832, Entity Classification Election, and checking the tax classification box. Absent an election, an SMLLC is taxed as a sole proprietorship and files Form 1040, Schedule C.

LLCs are usually required to file annual reports and pay annual fees to maintain status.

What Is an LLP?

An LLP is a business entity organized under state law, usually a uniform partnership act. Every state and the District of Columbia has LLP statutes. An LLP is comprised of partners; it must have more than one. LLPs provide partners with liability protection from errors and omissions of other partners and partnership employees under...