When it comes to business entities, there are a few different types that you can choose from. One of the most popular is the LLC. What is a limited liability company, and how does it work? What are the best LLC services to use (or should you use a lawyer)? What are the benefits and disadvantages of owning one? How do you find out who owns an LLC? We will answer all of those questions in this blog post and more! We will also discuss some of the available different types of LLCs.
So whether you are just starting in business or considering making a switch, this post has everything you need to know.
What is an LLC?
An LLC is a legal entity created by filing articles of organization with the state in which the business will operate. According to Venture Smarter, a business website well-known for providing expert guides for business entities, LLCs are hybrid entities that have characteristics of both corporations and partnerships. This means that they offer the personal liability protection of a corporation, but with the flexibility and pass-through taxation of a partnership. In most states, LLCs can be owned by one or more individuals, corporations, other LLCs, or a combination of these.
There are a few key things to know about LLCs:
- LLCs offer limited liability protection to their owners. It means that the owner’s personal assets are shielded from creditors if the business cannot pay its debts.
- An LLC is taxed as a pass-through entity. It means that the business itself is not taxed on its profits. Instead, the owners are taxed on their share of the profits (or losses) on their personal tax returns.
- LLCs can have one or more owners, which are also called members.
Advantages of LLCs
There are many advantages to owning a limited liability company. One of the biggest is the personal asset protection that it offers. Your personal assets, such as your home or savings account, are protected if your business is sued or unable to pay its debts. Another advantage of LLCs is their pass-through taxation. This means that the company itself is not taxed on its profits. Instead, the owners are taxed on their share of the profits (or losses) on their personal tax returns. This can save you a significant amount of money in taxes!
Another significant advantage of LLCs is that they are very flexible regarding ownership, taxes, and management. For example, you can choose to have your LLC taxed as a corporation, partnership, or sole proprietorship. You can also choose to have it managed by one person or by a group of people. This flexibility makes LLCs an excellent choice for businesses of all sizes and types.
Disadvantages of LLCs
There are a few disadvantages of LLCs to be aware of, including:
Forming and operating an LLC is often more expensive than being a sole proprietor or having a partnership. LLC owners have to pay a filing fee to be registered with the Secretary of State. Although it is not legally required, it is highly recommended that LLCs adopt a written LLC operating agreement that spells out how the LLC will be run. After the LLC is formed, annual fees and taxes must be paid to the state. These vary by state, but they can be as much as $800 per year or more for very lucrative LLCs.
The next drawback is the lack of flexibility when removing members. Some states require an LLC to be dissolved when a member leaves. It will also be necessary to execute administrative tasks to close the business properly. If a limited liability company has an operating agreement, the issue of removing or adding members can be written into it.
The other thing that can be considered a disadvantage is that they need to pay self-employment taxes. The IRS (Internal Revenue Service) considers LLC members to be self-employed. Members must contribute to their Medicare and Social Security accounts through self-employment taxes. The tax amount is calculated using the LLC’s net income.
Types of LLCs
Limited liability and pass-through taxes are two traits that all LLCs share, making them a unique combination of other business structures. Some LLC types are better suited to specific business situations. The most popular types of LLCs are shown below.
An LLC that conducts business in the state where it was founded is a domestic LLC.
An LLC that expands its business to another state is called a foreign LLC. For example, if an LLC operates in New York and they wish to grow and conduct business in Ohio, it will have to register the Ohio LLC as a foreign LLC.
A Professional LLC is a limited liability corporation formed to provide a professional service, such as medical or legal services. Certain LLC members must have the relevant state licenses to demonstrate their professional qualifications to create a professional LLC.
Personal liability is not limited in a professional limited liability company, and professional malpractice claims are not covered. As a result, you should get legal advice before incorporating a professional LLC.
A Series LLC is a particular type of LLC in which a single “parent” LLC protects a group of “child” firms from liability (individual protected series). Furthermore, under the single series LLC, each “child” business is sheltered from the obligations of the other companies.
LLCs and taxes
When you are starting your business, you choose a business structure. The IRS can tax you in one out of these three ways:
- sole proprietorship (if you’re a single-person LLC)
- partnership (if you have more than one member)
- or a corporation (either an S corporation or a C corporation).
Once this decision is made, the company calculates taxes for the IRS using those tax guidelines and then files an LLC return with the state where they do business.
Because the LLC’s revenues and losses are passed on to each owner, who subsequently files that information with their personal income tax return, LLCs are not subject to separate federal taxes unless they are a C-corporation.
This “flow-through” form prevents double taxation, which occurs when a corporation pays taxes on profits, which are then taxed again when the firm owner pays personal income tax.
On the other hand, business owners must pay self-employment taxes and may find themselves in a higher tax bracket. They may be able to save money by deciding to be taxed as an S-corporation in such cases.
Q: What is the difference between an LLC, an S-corp, and a partnership?
Answer: Many people confuse the structure of a business entity with the way an LLC is taxed. An S corporation is tax classification. The term LLC Tax doesn’t exist, so usually, even though you have a domestic limited liability company, the way you will be taxed with the IRS is one of these: sole proprietor, partnership, S-corp, or C-corp.
If an LLC has only one member, it will be taxed as a sole proprietorship. If there is more than one member(owner), it will be taxed as a partnership. Depending on your tax circumstances, you can then choose to be taxed as an S-corporation.
Q: How much does it cost to form an LLC?
Answer: The cost of founding a limited liability company varies by state. In general, you may anticipate paying between $50 and $500 to form your LLC and roughly $100 per year to keep it running. If you hire a lawyer or use a professional service provider to start or maintain your LLC, these costs will rise.
Q: What documents do I need to start an LLC?
Answer: Different states require different documents, but these are the basic ones that are common in most states:
- LLC’s Articles of Organization
- LLC Operating Agreement
- Get an EIN ( a nine-digit number assigned to businesses for tax purposes )
Apart from gathering these documents, you should hire a registered agent and find a unique name for your business.
In conclusion, before taking the plunge and starting your own business, be sure to consult with an experienced legal professional. They can help you understand the complex LLC laws and ensure that your new company is formed correctly and complies with all relevant regulations. With a little bit of preparation and guidance, starting your own LLC can be a smooth process that sets you up for success in the future.