The process to structure LLC businesses involves several steps. The first is its formation as a separate entity from its owners.

General Information for an LLC

The "LLC" designation means "limited liability company." The "C" does not mean "corporation," and an LLC is not a corporation. Setting up an LLC and completing the paperwork involved to run one is less complex than that required for a corporation.

Several important factors to consider regarding the running of an LLC include:

  • The owner of an LLC does not need to be a permanent resident of the United States nor a U.S. citizen.
  • LLCs are favorably regarded by suppliers, lenders, and partners.
  • An LLC may be subject to self-employment taxes.
  • If an existing business converts to an LLC structure, it will receive tax recognition on its appreciated assets.
  • There is no "one rule fits all" when it comes to forming an LLC. These businesses are treated differently depending on the state where the LLC is formed and registered.

Limited Personal Liability

An LLC is similar to a corporation when it comes to personal liability. In a corporation, shareholders are protected from personal liability for debts incurred and claims made against the corporation. The same is true with LLC owners, who also enjoy liability protections.

The assets of an LLC are used when it's necessary to pay off any business debts, which means the owners of an LLC will only lose the money each has invested in the company. This feature is referred to as "limited liability."

There are exceptions to personal liability protection afforded to LLC owners. This is also true for corporations. Exceptions include:

  • Either personally or directly injuring someone.
  • Personally guaranteeing a financial obligation that the LLC defaults on.
  • Failing to deposit withholding taxes from employees' wages.
  • Intentionally committing fraud, being involved in an illegal act, or harming someone or to the company due to reckless behavior.
  • Treating the LLC as part of an owner's personal affairs instead of a separate legal entity.

Securing a liability insurance policy can help shield an owner's personal assets when limited liability protection fails to do so. A policy may also protect personal assets if a court ignores your limited liability status. Finally, it can protect you and the LLC from lawsuits and legal claims.

LLC Taxes

A big difference between a corporation and an LLC is the payment of taxes. A corporation must pay taxes whereas a limited liability company is considered a "pass-through" tax entity. This means all profits and losses pass through to the owners who are each responsible for reporting the profits and losses when filing their personal tax return.

Each LLC member must make estimated quarterly tax payments to the Internal Revenue Service (IRS).

Co-owners of an LLC must file Form 1065, which is an informational return, annually with the IRS. This form is also required for partnerships. The form outlines the share of the profits or losses for each LLC member. The form is reviewed by the IRS to make sure each LLC member is correctly reporting his or her income.

LLC Membership and Management

When the owners of an LLC have equal management responsibilities, the LLC is referred to as "member managed." When one or more owners are responsible for managing the company, the LLC is referred to as "manager-managed."

LLC Formation

Forming an LLC includes:

  • Choosing a legal name.
  • Reserving the name, if possible. This option varies from state to state.
  • Filing articles of organization. In some states, the articles may be called a "certificate of formation" or "certificate of organization."
  • Paying the applicable filing fees for your state, which can range from $100 to $800.
  • Create a written operating agreement. The agreement clarifies the rights and responsibilities of each member, the percentage of interest in the LLC, and their share of the profit. The agreement does not need to be filed with the state.
  • Apply for applicable business licenses or certificates necessary for your business.
  • File Form SS-4 online for an Employer Identification Number from the IRS.
  • Apply for any other ID numbers that state and local agencies may require. This may be due to your obligation to pay things such as unemployment, disability, and other taxes associated with payroll.

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