Part nº1: Advantages of a Delaware LLC - a 3 part series providing an in-depth analysis of Delaware LLCs, by Dennis Swing Greene.
A Delaware Limited Liability Company is a “flow-through” entity (FTE) where income "flows through" to the beneficial owners; that is, the income of the Company is treated as taxable income of the shareholders in the jurisdiction where they are resident individually for tax purposes, not to the company where it is domiciled. Flow-through entities are also known as being “pass-through” or “fiscally transparent”.
On the positive side, the structure can avoid economic double taxation such as successive corporate tax followed by dividend tax on the shareholders because only owners or investors are taxed on income, not the Company. However, as taxable individuals, owners or “members” as they are called in Delaware, are not eligible for individual income tax credits or deductions on this “flow-through” income. Assessment is based on the Corporate Tax Code which is then taxed to the individual.
A Limited Liability Company: Advantages and Disadvantages
Choosing to use a Delaware Limited Liability Company can have long-reaching repercussions: taxes due, personal liability as well as applicable rules and regulations in the US and elsewhere.
Advantages:
+ Limited Liability: Unlike sole proprietorships or partnerships, an LLC allows the owners to shield themselves from personal liability if the business goes bankrupt, injures someone or otherwise runs into legal trouble. By defining a low share value as the basis for determining corporate liability, shareholders’ financial obligations can be held to a minimum. This means that, although the business might fold, courts and creditors will generally not be able to attach personally owned belongings. In other words, business and personal responsibility and assets remain separate.
+ Tax Flexibility: A LLC is not considered to be a separate entity from its Owners. This means that a LLC will not pay taxes directly; rather, the owners or “members” do individually in their jurisdiction of tax residence. This avoids double taxation that normally occurs with commercial companies: first corporate tax to the company profits, then a second assessment upon distribution of dividends to the shareholders.
However, Owners can also choose to have their LLC taxed as a US Corporation (albeit at 40%). This option is based on US “check-the-box regulations” and allows Owners to elect the way they want to be taxed.
+ Easy Set-Up: Starting a Limited Liability Corporation is generally simpler and faster than traditional forms of incorporation. Set-up costs can be as low as US$300 (± €235).
+ Less Paperwork: In terms of paperwork, LLCs are very flexible. Generally speaking, the LLC Operating Agreement (the equivalent of Company Statutes) is drafted so the Owner can choose the specific norms that govern the business. Otherwise, the Company will be governed by the default rules. With less stringent requirements for compliance and less necessary paperwork, LLCs are easier to form and easier to keep in good legal standing.
Next: Shortcomings of a Delaware LLC
Dennis Swing Greene is Chairman of the Board and International Fiscal Consultant for euroFINESCO s.a. Private consultations can be scheduled at in Guia (Albufeira) 289 561 333, Lisbon (Chiado) 213 424 210 and in Funchal (Sé), Madeira 291 221 095, by email at info@eurofinesco.com or on the internet at www.eurofinesco.com.
