• LLC taxation is flexible because it provides a choice.dollar symbol image by Alx from Fotolia.com
  
  The limited-liability company is the preferred business entity form because it is flexible, and the taxation of limited liability companies is no exception. Internal Revenue Service rules are extremely flexible regarding the taxation of limited-liability companies, primarily because each limited liability company gets to choose how it will be taxed. The limited-liability company can be taxed like a partnership, or it can be taxed like a corporation.
  
  

Election

• The IRS allows each limited liability company in the U.S. to decide whether it wants to be taxed as a partnership or a corporation. This is a huge benefit to limited-liability companies because each business can analyze which taxation method will save the most income taxes based on its own distinct business model. Not all businesses are created equal, so some LLCs might elect partnership taxation, while others elect corporate taxation. However, an LLC can generally only change its election once every five years, so you can't make the election annually depending on how things worked in that year.
  
  

Partnership Benefits

• The primary benefit of electing taxation in the partnership form is that the IRS allows pass-through taxation. This means the owners of the limited liability company pay all the taxes individually; the LLC does not actually pay any taxes. In other words, there is just one level of taxation that occurs on the LLC's revenues. In corporate-style taxation, on the other hand, the LLC first pays income tax on all business income, and then each of the owners pays income tax on any distributions, or "dividends," paid from the LLC to the various owners. In other words, corporate-style taxation means taxation at two levels.
  
  

Corporate Taxation

• It may seem obvious that because of the double-taxation effect, corporate-style taxation is less desirable than partnership-style taxation. However, sometimes it makes financial sense to elect corporate style taxation because the income tax at the corporate level is less than the income tax at the owner level. So, if an LLC is going to keep the large percentage of revenues it earns each year, it makes sense to elect corporate-style taxation because the company gets the lower tax rates without the drawback of double taxation. For example, startup LLCs often retain most of their revenues to reinvest in growing the business, so corporate-style taxation can reduce total income taxes.