Setting up a limited liability company (LLC) is the best business structure for most small businesses because they are inexpensive, easy to form and simple to maintain. They have tax options that benefit your bottom line.
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.
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.
The decision to form a limited liability company (LLC) or a corporation depends on the type of business an individual is creating, the potential tax consequences of forming the entity and other considerations. Both types of entities have the important legal advantage of helping to protect assets from creditors and providing an additional layer of protection against legal liability. Although many small businesses are limited liability companies (LLCs), some founders may not really need the protections of an LLC.
Forming an LLC gives your business a separate legal identity. In the eyes of the law, it is a separate "person" that can own money and property, have a bank account, make agreements, sue people and be sued. A limited liability company (LLC) is a popular choice among small business owners because of the liability protection, management flexibility and tax advantages that this form of business entity often offers. Understanding the benefits and disadvantages of an LLC, how to start an LLC, where to form your LLC and other key issues is essential to business success.
Due to the lack of personal liability, creditors or individuals who file claims against an LLC cannot collect against personal assets such as your personal vehicle, personal bank account or primary residence. If you provide a licensed professional service in Pennsylvania and wish to form an LLC, you will be required to form a professional limited liability company (PLLC).In addition, your business must adhere to your state's LLC naming conventions, which generally means that your business name must also include "LLC" in the title.
Any business owner who wants to limit his or her personal liability for the debts and claims of the business should consider forming an LLC. The rule applies to LLCs because for federal tax purposes they are corporations or partnerships. In addition, an LLC can offer several classes of membership interests, whereas an S corporation can only have one class of stock. The acronym "LLC" stands for "Limited Liability Company," and forming one is an easy and inexpensive way to structure your small business.
LLCs offer their owners liability protection, but if care is not taken, the owners, members or shareholders of an LLC can be personally liable for the company's debts. Generally, this means that "LLC" or "limited liability company" must appear in the name of your business. Creating an LLC is a much simpler process than creating a corporation and generally requires less paperwork.
