LLC Corporation: Everything You Need to Know
An LLC corporation is less complex and more flexible than an S-corp or C-corp. 4 min read
An LLC corporation is less complex and more flexible than an S-corp or C-corp. Whether you are a sole proprietor, a multi-member corporation, or a simple partnership, an LLC gives you the protection of a corporation without the formalities and complexity of a traditional corporation.
Advantages of Starting an LLC
There are many advantages to starting an LLC as opposed to a corporation. However, each business owner needs to determine which option is more beneficial to them and their business.
- Pass-through taxes. Pass-through taxes are one of the most beneficial aspects of an LLC. A corporate tax return is not necessary. Each owner claims their profits and losses on their own tax return, so you avoid paying taxes twice.
- No requirement for residency. Anyone has the ability form an LLC. There is no residency requirement, and filing for an LLC gives you some legal protection by limiting your liability for the obligations and debts of your business.
- Legal protection. Creating an LLC gives you limited legal liability protection for the obligations and debts of the business. Additionally, you choose how your LLC is taxed.
- Tax status is more versatile. According to the tax laws, the IRS taxes an LLC as a sole proprietorship if there is only one member and as a partnership if there is more than one managing member. However, an LLC may elect to be taxed as a C-corporation or S-corporation at any time.
- Flexible profit distribution. Flexible profit distributions are another benefit for LLCs. Flexible profit distribution means the profits can be paid to any member and at different proportions than the ownership percentages if the members choose.
- Minimal compliance requirements. LLCs are not required to conduct the same meetings that their corporate counterparts are required to conduct. Typically corporations are required to hold an annual meeting of directors and shareholders. At the annual meeting, the corporation adopts bylaws and is required to keep meeting minutes for all meetings and for all formal corporate resolutions. These requirements do not apply to the members of an LLC, who may conduct meetings as they see fit. They may also decide if they want to record meeting minutes; they are not required to do so by law.
- Enhanced credibility. Some lenders, suppliers, and partners may look more favorably on you when you file as an LLC as opposed to being a sole-proprietor.
Disadvantages of Starting an LLC
Despite the many benefits, there are also some drawbacks to starting your business as an LLC:
- Limited growth potential. As an LLC, your growth potential may be limited because, unlike a corporation, an LLC is unable to sell stock in a company to raise money from investors.
- State laws create a lack of uniformity. LLCs are also treated differently in each state, so there is the potential for your LLC to be treated differently if you expand to another state.
- Self-employment tax may apply. Depending on your state, self-employment taxes can be an issue. Many times the profits you pass through and report as personal income are taxed at a higher than they would be at the corporate level. You are still required to pay for inclusion in federal programs such as Medicare and Social Security.
- Tax recognition on appreciated assets. When your assets appreciate, you can be charged taxes at a higher rate, or the IRS can require you to pay taxes on the appreciation. In other words, the IRS may look at asset appreciation as additional taxable income.
- LLC termination. Typically, when a member of an LLC terminates their affiliation with the company, the LLC is terminated. This is unlike a corporation, which still exists regardless of shareholders coming and going.
- Banking fees and confusion. It is required that your personal finances be separate from your business, so you'll need a business checking account. Banks charge different, often higher, fees for business accounts. Also, you can not cash a check that is made out to your LLC. It has to be deposited into the LLC account, and banks may charge more for these deposits.
You have to be very careful about keeping your personal and LLC business expenses separate. When you mix your personal and business finances, you lose the limited liability protection. To avoid that, you must always keep bank accounts and bank cards separate.
- Open a business account with a bank you do not have your personal accounts with.
- Keep all personal and business accounts separate.
- If you ever make a mistake or use the wrong account, pay the company back.
- Alternatively, you can pay for everything with your personal account and charge your company for the fees on their expense report.
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