More screen printers are looking toward LLC status as a way to operate competitively while protecting their personal assets. Read on to find out about the other advantages associated with limited liability companies.
A corporation can also convert to LLC status, although it may not be a wise move for the shareholders of many incorporated businesses. Generally, it is not feasible for a screen-printing business operating as a corporation, either a regular or as an S corporation, to convert to LLC status. IRS regulations require that the incorporated screen printer liquidate first, thus creating considerable tax liability.
To convert, a corporation must first be liquidated and pay tax on any gain in its fair market value. Even a corporation with depressed values that converts would have to be prepared to prove its estimate to the IRS. That could mean a costly appraisal.
As with many good things, there are tax questions surrounding the use of an LLC to operate the screen-printing business. For starters, there is the Self-Employment Tax Act (SETA). Limited partners and S corporation shareholders generally are not subject to self-employment taxes—a 2.9 percent Medicare levy on all salaries and 12.4 percent FICA (Social Security) tax on income up to $102,000 (in 2008)—but are passive LLC members?
The IRS’s position, subject to change, is that LLC members who participate in management are subject to employment taxes. According to the IRD, if LLC members are legitimate, passive members, they should not be subject to those employment taxes.
The LCC is OK—sometimes
Limited liability companies work for start-ups, for screen-printing operations branching out, and in lieu of LPs for such financial entities as trading pools and hedge funds. Lawyers are increasingly recommending them for estate planning—reorganize assets or the family business as an LLC, and you can gradually give most of the shares to your heirs while retaining management control.
The LLC is rapidly becoming the entity of choice for many business owners, shareholders, and partners in every realm. The LLC will continue to gain momentum as more and more people learn of its existence. You might be well advised to consider its many benefits—and its possible pitfalls—for your screen-printing business. Many screen printers, once they’ve considered all of the pros and cons, have discovered the LLC structure is the most profitable operating entity for their operations.
Mark E. Battersby is a tax and financial advisor, freelance writer, and columnist who’s been involved with tax-planning and related issues for more than 30 years. He works in Ardmore, PA. You can reach him through Screen Printing magazine by e-mailing email@example.com.
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