LLC Basics: Everything You Need to Know
LLC basics begin with creating a protective wall between your business and your personal assets.3 min read
2. Basics of LLC Management
3. Basics of LLC Taxes
4. Basics of Forming an LLC
Updated November 25, 2020:
LLC basics begin with creating a protective wall between your business and your personal assets. This prevents owners from being held personally responsible for lawsuits or for negligent or unlawful business transactions.
Information About Limited Liability Companies (LLCs)
An LLC is considered a common business structure that provides its managing members with personal protection from the company's liabilities. For a limited liability company (LLC), limited liability partnership, limited partnership, or corporation to have limited liability, some things need to be observed. For example, you must treat the company as a business and keep company and personal affairs separate.
This is possible by doing the following:
- Opening a separate bank account for business.
- Maintaining separate books and records.
- Having a separate mailing address for the LLC.
If these steps are not implemented, a judge can disregard the limited liability that the LLC is normally entitled to. This could mean losing your asset protection.
Basics of LLC Management
Managing a limited liability company is not complicated compared to the management process for a corporation, which uses a three-tiered management structure. Also, unlike a corporation, an LLC is not required to have officers or shareholders. Nor does an LLC require holding mandatory meetings.
Owners of a limited liability company are called members. An LLC can be owned by one individual, making the company a single-member LLC. If the company is owned by two or more individuals, it's a multi-member LLC. Members have complete freedom to operate their business in a way that is most beneficial and successful for the company.
Members have two options when it comes to managing the business. The first option allows members to choose and appoint business managers whose responsibilities are supervision of the company and handling its day-to-day operations. With the second option, members can have direct or indirect management responsibilities within the organization. This includes complete flexibility in how the profits and losses are divided. In this case, an advantage to members is that the division of profits and losses is not based on the members' individual percentage interest in the company.
Basics of LLC Taxes
With taxes, members of an LLC are subject to what is referred to as "pass-through" taxation. This is due to the tax authorities not recognizing an LLC structure as a specific tax classification. Members have the option to choose the tax classification that is most appropriate for the company. The tax classification choices are:
- Sole Proprietorship.
The member(s) must file IRS Form 8832. Single-Member LLCs are automatically classified as a sole-proprietorship if the owner fails to complete and file Form 8832. Traditional LLCs are considered pass-through entities because the company's profits and losses pass through to the individual(s) who report the profits and losses on their personal tax return versus a separate tax filing for the business.
There are times when it may be to your advantage to opt to file Form 2553 so the company is treated as an S corporation. Legally, though, it will remain an LLC. Filing as an S corporation can save thousands of dollars, and self-employment tax is set at 2.9 percent instead of 15.3 percent.
While the financials of the LLC are filed as part of the personal tax return, members have protection from personal liability in the event of any negative action, such as a lawsuit, related to the LLC. In this regard, LLC owners are protected the same as they would be with a corporation. Like other businesses, an LLC can claim many deductions when filing taxes as well as taking advantage of certain tax credits. For example, a member performing business functions from home can claim the home office deduction.
Basics of Forming an LLC
Remember that you cannot "LLC yourself," and you cannot form a Limited Liability Corporation. Otherwise, the basic steps to formation include:
- Picking a name for the LLC.
- Creating Articles of Organization, which is also called the Certification of Organization or Certificate of Formation.
- Creating an LLC Operating Agreement.
- Applying for a Federal Tax ID Number (EIN).
- Filing an Annual Report.
- Filing by mail or online with the Secretary of State.
- Paying the filing fee, which can range from $100 to $800.
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