Many small businesses are organized as limited liability companies, or LLCs, because an LLC offers the same liability protection as a corporation, but with a less rigid structure and fewer administrative requirements.
An LLC, or limited liability company, is a US business structure that combines the simplicity, flexibility and tax advantages of a partnership with the personal liability protection of a corporation.
The owners of LLCs are called members. An LLC may have one or more "members", the official term for its owners.
Members can be individuals or other businesses, and there is no limit on the number of members an LLC can have.
With an LLC structure, the members' personal assets are protected from the company's creditors.
Here are the advantages and disadvantages of an LLC so you can determine the right structure for your business.
Structuring your business as an LLC offers a number of advantages.
The members are not personally liable for the actions of the company.
This means that members' personal assets - houses, cars, bank accounts and investments - are protected from creditors trying to collect from the company. This protection is maintained as long as you run your business properly and keep your personal and business finances separate.
Unless you choose otherwise, an LLC is a pass-through entity, which means its profits go directly to its members without being taxed by the government at the company level.
Instead, members pay taxes on the profits on their own federal income tax returns.
This makes tax filing easier than if your business were taxed at the corporate level.
If your business loses money, you and the other members can take the hit on your own tax returns and reduce your tax burdens.
Members can manage an LLC, allowing all owners to share in the day-to-day decision making of the business. They can also manage the company as professional managers, who can be members or outsiders.
This is useful if the members want to hire people with more experience in running a business.
In many states, an LLC is managed by its members by default, unless explicitly stated otherwise in documents filed with the secretary of state or equivalent agency.
The initial paperwork and fees for an LLC are relatively light, although there is a wide variation in what states charge in fees and taxes.
The process is simple enough that owners can carry it out without special knowledge, although it is a good idea to consult an attorney or accountant for help. Ongoing requirements are usually annual.
The IRS considers LLCs to be partnerships for tax purposes, unless the members elect to be taxed as a corporation.
If your LLC is taxed as a partnership, the government considers the members who work for the company to be self-employed. This means that those members are personally liable to pay Social Security and Medicare taxes, collectively known as self-employment tax, based on the total net income of the business.
If your LLC files forms with the IRS to be taxed as an S corporation, you and the other owners who work for the business pay Social Security and Medicare taxes only on your actual compensation rather than on all of the business's pre-tax profits.
Becoming an LLC is the next step in growing your business and protecting your assets.
You should form an LLC when you are serious about growing your business and making a profit.
A limited liability company (LLC) is one of the most common types of business structure used by entities throughout the U, S. LLCs combine certain aspects of partnerships and corporations, providing owners with the tax benefits of a partnership and the liability protection of a corporation.
However, these advantages come with certain disadvantages that entrepreneurs should consider before determining which type of company is best for their particular situation.
An LLC can be run by any number of owners, officially known as members.
As a small business owner, you want all the flexibility, tax advantages and personal protection you can get. It is important to understand that the S corporation designation is nothing more than a tax election made to have your business taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
LLCs are easier and less expensive to establish and simpler to maintain and remain in compliance with applicable business laws, as there are less stringent operating regulations and reporting requirements.
The acronym "LLC" stands for "Limited Liability Company," and forming one is an easy and inexpensive way to structure your small business. An LLC allows for pass-through taxation, meaning that business income or losses are recorded and taxed on the owner's personal tax return.
The other members of a manager-managed LLC are passive investors who do not participate in the operations of the business.
LLCs are the most basic business entity to establish and operate, and provide tremendous adaptability for different business-related circumstances.
Although LLCs and S corporations are two terms that are often discussed side by side, they actually refer to different aspects of a business. LLCs can be formed by anyone starting a business or currently running a business as a sole proprietor or within a partnership.
Any small business that does not need outside investors will be better off paying taxes if it chooses an LLC. One of the main advantages of choosing to organize your business as an LLC is that it is relatively simple and inexpensive to set up.