Two important objectives of business owners like you are liability protection and favorable tax treatment. Unfortunately, the two don’t co-exist in most types of business entities.

For example, C corporations provide liability protection for all shareholders but create earnings that get taxed twice. S corporations dodge double taxation but have restrictive ownership rules and must allocate pass-through income proportionately to the shareholders.

Partnerships provide pass-through taxation and can allocate pass-through income disproportionately to the partners. But general partners have no liability protection, and limited partners forfeit their protection if they are active in managing the business.

Sole proprietorships avoid double taxation (since there is no separate entity) but provide zero liability protection.

This is where limited liability companies (LLCs) come in. LLCs provide liability protection for all owners (known as members), regardless of their managerial involvement. And multimember LLCs automatically qualify for the favorable partnership-tax rules.

But as in most things tax, the benefits that LLCs provide can be lost or curtailed if you don’t take the right action. ... Log in to view full article.