Why is an llc a good option for owning a business?

An LLC is a good option for business owners because of the tax advantages and liability protection that the LLC offers. Read more here.

Why is an llc a good option for owning a business?

The simple and adaptable business structure of an LLC is perfect for many small businesses.

While both corporations and LLCs offer their owners limited personal liability, LLC owners can also take advantage of the LLC's tax advantages, management flexibility and minimal recordkeeping and reporting requirements.

Protecting personal assets from litigation is paramount for entrepreneurs. The LLC offers the same protection as a corporation for the owner-operator of a business.

This protection is why we never recommend general partnerships or sole proprietorships, as these structures offer no protection to the owner.

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Corporations are required to hold regular board and shareholder meetings, comply with more paperwork requirements and file an annual report with the Secretary of State's office.

An entrepreneur has a lot to do and may find himself circumventing these requirements, which is never a good idea. With a C corporation, profits are first taxed at the corporate level.

Then the salary or dividends received from the corporation will be taxed a second time at the individual rate, which can be as high as 39.6%, not including state income tax and Medicare tax.

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.

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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. 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. A judge may rule that your LLC structure does not protect your personal assets. This action is called "piercing the corporate veil," and you may be at risk if, for example, you do not clearly separate business and personal transactions or if you run the business fraudulently in a way that causes losses to others.

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.

In many states, if a member leaves the company, goes bankrupt or dies, the LLC must dissolve and the remaining members are responsible for all legal and financial obligations necessary to terminate the company.  These members can continue to do business, of course; they will just have to start a new LLC from scratch. 

Of course, it is possible to change the structure of a company if the nature of the business changes and requires it, but doing so can often mean incurring a tax penalty of one kind or another. Therefore, it is best for the business owner to determine the most appropriate choice of business entity when first establishing the company.

Other common steps include filing the LLC's articles of organization and obtaining the necessary licenses and permits.

However, dividend income or some of the remaining profits (after the owner's salary has been paid) may pass to the owner, but not as an employee, meaning that they will not pay Social Security and Medicare taxes on those funds.

While the profits of corporations and their investors are usually taxable, LLCs avoid double taxation altogether.

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Single-member LLCs are generally treated as disregarded entities, which means that the activities of the business must be reflected on the owner's federal income tax return.

An LLC combines the limited liability advantages of corporations with the benefits of pass-through taxation that are unique to sole proprietorships and partnerships.

An LLC allows for pass-through taxation, which means that business income or losses are recorded and taxed on the owner's personal tax return.

Also, because LLCs allow you the freedom to operate a business without the same responsibilities as a sole proprietor, you can adjust the roles of the partners as you see fit.

In other words, the owner's personal assets cannot be used for legal claims against the business. Instead, the profits of the business pass through the business entity and are only reported once for tax purposes on the owner's personal tax return.

An LLC also has advantages over a corporation, including greater tax flexibility and fewer corporate formalities.

In the event of litigation, failure to comply with any formalities can be used to attempt to lift the corporate veil, i.e. to hold individuals personally liable for the obligations of the LLC.

LLCs are usually taxed at personal rates, but some LLC owners choose to be taxed as a separate entity with its own federal identification number. LLC members are not limited to their ownership ratio, but may choose to divide profits in a different way.

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