Domestic for Profit LLC: Everything You Need to Know
A domestic for-profit LLC is a limited liability company that does business in the state where it was formed.3 min read
2. LLCs vs For Profit Corporations: Key Differences
3. Management Type and Structure
4. Taxation Differences
A domestic for-profit LLC is a limited liability company that does business in the state where it was formed.
An Introduction to LLCs vs. For-Profit Corporations
In general, LLCs are not considered corporations. However, they may elect to be treated like corporations for tax purposes. Domestic corporations are able to conduct business in states outside of where they filed their formation documents, in which they're known as foreign corporations.
Except for sole proprietorships, business organizations must register as a specific business type in the state they're created. States recognize the following business types:
- Limited liability companies
- Variations on these forms
LLCs and corporations share similarities, like providing limited liability protection to their owners.
Both business types are treated as separate legal entities from their owners. Each requires filing formation documents with the Secretary of State (or equivalent office) and paying necessary fees. However, corporations have more formalities compared to LLCs.
LLCs vs For Profit Corporations: Key Differences
There's no such entity as a "limited liability corporation." LLC stands for “limited liability company.” Individuals don't incorporate a business as an LLC; they only incorporate corporations.
LLC owners are called members. LLC members may be corporations, other LLCs, individuals, or foreign entities. They can have an unlimited number of members.
Corporation owners are referred to as company shareholders. There are restrictions on corporate ownership, depending on the type of corporation. C corporations allow non-resident aliens, LLCs, and other corporations to act as shareholders. Like LLCs, C corps can have unlimited shareholders.
Management Type and Structure
LLCs may be managed by members or managers. In a member-managed company, members play an active role in day-to-day business affairs. In a manager-managed LLC, managers are employed to take care of daily business affairs.
Corporations have a detailed structure that consists of various corporate employees, officers, and board members. Corporations follow corporate bylaws that outline the company's governing rules and regulations. LLCs follow rules and regulations outlined in their operating agreement.
Corporations are required to file annual reports with the state and do the following:
- Hold yearly board meetings
- Hold stockholder meetings
- Record corporate minutes
LLCs don't have to follow all of these formalities.
For tax purposes, businesses may fall into one of two camps.
- Pass-through entities: In a pass-through business, company profits and losses pass through the business to the owners. Business income is treated like the owners' income, so the owners pay taxes on this income on their personal tax returns. LLCs, like partnerships and S corporations, are pass-through businesses.
- Separate business entities: C corporations are treated as legally separate businesses entities. The corporation's profits and losses are taxable to the business, not to company shareholders. However, corporations are subject to double taxation: the business pays taxes on company profits, and the shareholders pay taxes on the dividends they receive from the corporation.
LLCs and corporations are taxed differently, and their owners have different tax consequences.
Corporations, since they're treated as separate entities, are taxed at a corporate rate. LLCs are taxed according to their owners' adjusted gross income. Sometimes, LLCs elect to be taxed as corporations if they feel it's beneficial to the company.
Corporation owners don't receive a salary; instead, they're paid in dividends. They pay taxes based on their dividend income.
LLC members are taxed like partnership partners. They receive a distributive share of company profits every year. They then pay taxes on their share of the profits on their individual tax returns.
LLC members are responsible for paying self-employment taxes on the income they receive from the business. Corporate owners who also work in the business are treated as employees. They pay FICA taxes and are taxed on their employment income.
You may choose your business structure based on a number of factors, including how you are taxed and paid.
Unlike nonprofit companies, which are designed to serve the public, for-profit companies are created to make a profit for their owners. The term “domestic” may apply to the specific jurisdiction where a company starts, or it may apply to the country. Knowing the pros and cons that come with creating an LLC may help you make the right decision for the business structure you choose to operate.
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