A lot of new businesses and startups are structured as LLCs because they are easy to run, cheap to set up, and flexible. These LLCs are usually taxed as partnerships under the Internal Revenue Code and receive the beneficial flow-through treatment for income tax purposes (not all LLCs are partnerships; some can be S Corporations or C Corporations - see check the box regulations). A lot of times, the owners of these LLCs treat the partnership as if it were the same as their sole proprietorship. That is a big no-no. There are many negative tax and legal consequences of doing this. The LLC should be treated as a separate entity in most instances (there are exceptions to this general rule).
Another pitfall that we often see is when a successful LLC owner wants to hand over the business to the next generation, sell to a new owner or acquire a new partner. For example, when the owner is ready to retire or sell a portion of her business, she may not fully understand the tax consequences of having the assets placed in the LLC. When a portion of a partnership or an LLC, taxed as a partnership, is sold there are a plethora of tax and economic issues at play. For example if 50% or more of the LLC interest is sold within a 12-month period, the partnership may suffer what's considered a Section 708 "technical termination," which may have adverse consequences to the existing partners and the partnership. Other items to consider include "hot asset" distribution issues, the tax differences between a sale vs. a liquidation of a partnership interest, and the disguised sale rules. There are economic issues at play as well such as control of the entity, the riskiness of the business, and the potential for continued profit after the departure of the founder.
If you're planning on selling a business or buying into a business, make sure to consult with your CPA, tax adviser and attorney, especially if its a partnership or LLC.
Please note that every individual tax or economic situation is unique. Before you embark on any specific tax or financial position, it is important to consult your tax, financial adviser and/or attorney. The above isn't and shouldn't be construed as tax, financial, professional, or legal advice.
If you're planning on selling a business or buying into a business, make sure to consult with your CPA, tax adviser and attorney, especially if its a partnership or LLC.
Please note that every individual tax or economic situation is unique. Before you embark on any specific tax or financial position, it is important to consult your tax, financial adviser and/or attorney. The above isn't and shouldn't be construed as tax, financial, professional, or legal advice.
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