LLC Business Structure: Everything You Need to Know
LLC business structure offers personal liability protection like a corporation while retaining federal tax benefits of sole proprietorship and partnership businesses.3 min read
Facts About Limited Liability Companys
- Income of an LLC is not subject to federal income tax at the corporate level.
- Income of the company passes on to owners or members of the company, who then include it in their personal tax returns.
- Co-owned LLCs are required to file Form 1065 with the IRS.
- Form 1065 is an annual informational return containing details of each member's share in the company's profits.
- IRS reviews Form 1065 in order to ensure that the members of an LLC are including their share of income in their individual tax returns.
- Partnership firms too file Form 1065.
- A limited liability company makes the business structure more legit and yet keeps it simple and flexible.
- Forming an LLC is comparatively more difficult than forming sole proprietorship and partnership businesses but is easier than a corporation.
- LLC owners cannot be held personally responsible for debts and liabilities of the company.
- If an LLC fails to pay its creditors, they can't pursue personal assets of the owners.
- It's only the company assets that can be used to settle business debts. Thus, LLC owners, at most, can incur losses only to the extent of their investment in the company.
Advantages of Starting an LLC
- LLC owners need not be citizens and residents of the U.S.
- It limits your personal liability against business debts and obligations.
- It enhances the credibility of the business. Banks and investors are more likely to offer funds to an LLC.
Disadvantages of Starting an LLC
- An LLC cannot issue shares, which can stunt its growth.
- There is no uniform treatment across the states.
- LLC earnings may be subject to self-employment tax.
- It may have to pay taxes on the appreciated value of assets, for example, when you are converting your existing business into an LLC.
When Can an LLC Owner Be Held Personally Liable?
An LLC owner may be held personally liable if he:
- Personally injures someone.
- Personally guarantees a debt which the LLC fails to pay.
- Does not deposit taxes deducted from employees' wages.
- Acts fraudulently, illegally, or negligently, causing harm to someone.
- Uses the company for his personal affairs, instead of treating it as a separate entity.
How to Avoid Being Personally Liable in an LLC
- Act judiciously. Do not hide or misrepresent facts.
- Make sure the company has enough funds to meet its expenses.
- Keep the LLC separate from your personal business.
- Obtain an employer identification number, open a separate bank account, and maintain proper books of accounts for your LLC.
- Have a formal LLC operating agreement. It gives more credibility to the separate identity of your LLC.
A business liability policy can help you protect your personal assets. For example, if you run a body massage center and a client gets injured during a massage session, your business insurance can have you covered. A business policy is also helpful in cases where the court rejects your limited liability status. Business insurance, however, does not protect your LLC from unpaid debts.
How to Create an LLC
- Choose and reserve a business name for your LLC.
- File Articles of Incorporation.
- Choose members or appoint managers to run the business.
- Decide on the number of owners.
- Get licenses and permits applicable to your business.
- Apply for an Employer Identification Number (EIN).
- Apply for local ID numbers as required by your state laws. Usually businesses are required to pay disability, unemployment, and other payroll taxes.
Filing fees range between $100 and $800.
Number of Members
Most of the states allow forming an LLC even with a single person.
One Page Form
Several states have a simple, one-page form for articles of organization. You just need to fill out some basic details about the LLC and the registered agent authorized to receive legal documents on behalf of the LLC.
Details of Members
In some states, you must also submit a list of members' names and addresses.
You must create an LLC operating agreement.
Ending an LLC
In several states, an LLC dissolves when any of the members leave the company. This is, however, subject to the operating agreement.
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