Are you starting a business and you’ve heard the term LLC? Other business owners, friends and family have said that is the way to go. Not sure about and LLC and want to understand what it is and what the advantages and disadvantages are and how to move forward? Here is information about an LLC to help you make your decision.
Business formation
When you open a business, one of the things that you must decide is what form of business entity to establish. The form of business will determine which type of income tax return form you will have to file. The most popular forms of business are the
- sole proprietorship,
- partnership,
- corporation,
- S corporation, and
- Limited Liability Company (LLC)
What is a Limited Liability Company?
“A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.
Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation,” reports the IRS.gov.
Advantages
Here are the advantages of starting your business as an LLC:
Tax rates / flexibility
For tax purposes, the IRS does not consider an LLC to be a distinct separate entity. This means that, at least initially, the IRS will not tax the LLC directly. LLC members get to determine how they want to be taxed. There are several options:
- Single member LLC taxed like a sole proprietorship. Profits or losses from the business are not taxed directly but instead are taxed through the member’s personal federal tax return.
- Partners in an LLC taxes like a traditional partnership for tax purposes.
- LLC filing as a Corporation taxes members as if they were corporation.
No double taxation
Corporate owners are subject to double taxation. An LLC owner is not. The corporation pays taxes on corporate net income, and the corporate owners must pay tax on any dividend income.
Franchise taxes
Corporations in some states must pay state corporate franchise taxes. In some states, LLC’s are not required to pay this tax. Check with your CPA on your state requirements.
Less Paperwork:
LLCs are very flexible with the LLC Operating Agreement where you can create the rules that govern your business. Because of this, LLCs can be much easier to form and keep in good legal standing with less paperwork and compliance issues.
Limited Liability:
LLCs provide their members protection from liability (your personal assets) which means that members are not personally liable for debts.
Disadvantages
Profits are taxable
On the profit of the company, LLC members must pay taxes on their distributive share.
No property tax exemption
With an LLC, there is no property tax exemption.
Self-employment taxes
LLC owners must pay self-employment taxes which includes Social Security / Medicare unless you choose to be taxed like a corporation
Confusion About Roles:
LLCs generally do not have specific roles like directors, managers, and employees which can make it difficult for the company and investors to know who’s in charge and who can sign contracts, etc. If you create an LLC Operating Agreement, you can avoid some of the confusion by spelling it out in the document.
Limited Life:
In some states, if a member leaves the LLC, the LLC ceases to exist. You can avoid this if you spell out the arrangement in the Operating Agreement.
With the changing laws and complex compliance issues, it is extremely important to have a CPA that you can trust and ask about issues as they come up. It is highly recommended that you open your LLC with experienced help.
Joshua Wilson, CPA, PC is a full-service public accounting firm that specializes in accounting, tax preparation, tax planning, & business development for small businesses in Winder, GA and the surrounding areas. Give Joshua a call today to set up a consultation at 770-856-1309 or email him at josh@joshuawilsoncpa.com.