LLC Entity Type: Everything You Need to Know
LLC entity type is a type of business structure that operates as a hybrid between a corporation and partnership.3 min read
2. Tax Structure
3. Personal Protection
5. How to Determine Taxation
6. How to Know if an LLC is Right for My Business
LLC entity type is a type of business structure that operates as a hybrid between a corporation and partnership. When you decide to form a business, you might be trying to think of the best business structure for your company.
Before you decide which type works best for your business, you should check with your state’s secretary of state office to see if the type of business you want to form is actually available in your state.
Limited Liability Company: Background
There are many great business features for the LLC, which is why many businesses choose to register as an LLC as opposed to another type of business structure. Keep in mind that there are certain requirements when creating and maintaining your LLC; such requirements vary by state. But while there could be various requirements and ongoing formalities, the benefits of the LLC remain the same. Some of these benefits include:
- Tax structure
- Personal protection
The LLC operates as a pass-through tax entity, which means that all profits, losses, and expenses are reported on the members’ personal income tax returns. As such, the LLC itself will not file corporate income taxes. Rather, the business will file an information tax return. This form simply indicates the percentage of profits and losses that each member will need to report on his or her tax return. It will also identify the membership percentage of ownership.
Similar to a Corporation, the LLC offers personal protection of all debts and obligations of the LLC. This means that any outstanding debt that the LLC owes cannot be satisfied by using the members’ personal assets. Therefore, if a legal suit arises, creditors cannot take the member’s car, home, personal bank account, or any other personal asset that is owned by the member.
The LLC offers great flexibility in terms of its management structure. Unlike the corporation, an LLC doesn’t need to hire a board of directors or officers. Instead, the members (who are the owners of the business) can manage the LLC themselves. Alternatively, they can hire an outside manager to oversee the business affairs. If they do in fact choose to hire a manager, then the LLC members will not have oversight of the business operations. Instead, the members’ will have general voting rights as well as rights to make decisions on significant business issues.
How to Determine Taxation
Since the IRS doesn’t recognize the LLC as a taxable entity, it will need to elect how it wants to be taxed. If you operate a single-member LLC, then you will be taxed as a sole proprietorship. Thus, you will report all income and expenses on Schedule C of Form 1040, which is your personal tax return. If, however, you operate a multi-member LLC, then you can choose to be taxed as a corporation or partnership.
For tax purposes, LLCs are similar to S corporations, as both entities operate as pass-through tax entities. Therefore, electing to be taxed as an S Corp will essentially not change how you will be taxed as an LLC.
How to Know if an LLC is Right for My Business
- If you have a start-up company that anticipates losses for the first few years of establishing and want to pass through the losses from the business to yourself and other members.
- If you prefer to have flexible accounting methods, since LLCs aren’t required to use the accrual method of accounting in the way C corporations are required.
- If your LLC is going to own real estate.
- If you want flexibility in terms of the management structure, as LLCs enjoy increased flexibility over other types of businesses. For example, LLCs can choose to operate as either a member or manager-managed LLC.
- You want to reduce business formalities and ongoing requirements, as LLCs need not hold annual meetings of directors and shareholders as a corporation does.
- You want flexibility in sharing profits with other members.
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