Type of LLC: Everything You Need to Know
Is a type of LLC a good business structure, or should you go with a corporation? Starting a new business or buying an existing one comes with the decision of what company or corporation type is best for you.3 min read
Is a type of LLC a good business structure, or should you go with a corporation? Starting a new business or buying an existing one comes with the decision of what company or corporation type is best for you. Each has advantages and disadvantages in which you should consider when making up your mind whether to form an LLC, incorporate, or file a DBA.
Incorporating Your Business
In order to incorporate your business as a C or S corporation or LLC, you have to file the corresponding formation documents with the appropriate state agency. Incorporating and forming an LLC help with the protection of personal assets. In contrast, sole proprietorships and partnerships using a DBA incur unlimited liability.
A corporation is a type of business that is separate from its owners, who are known as shareholders. The owners may also have the role of executives or employees, and are compensated as such for their duties. C and S corporations are two of the most common incorporation structures used by businesses.
Multiple-owner businesses are owned by several people. These types of businesses are covered by partnerships and limited liability companies. In these business structures, owners are not employees.
Single-owner businesses, also known as sole proprietorship, are owned by an individual. This also includes single-owner LLCs. A sole proprietor doesn't have to register with the state, but an LLC does.
The different types of businesses are set by the states and handled by the state business division or corporations offices. Some states may only allow the formation of certain types of businesses. Check with the Secretary of State and/or the business division to find out if the type of business you're interested in forming is allowed in your state.
This is another type of business that's formed under state law and gives you personal liability protection. All states let you set up an LLC through the act of registering Articles of Incorporation or similar documents. From a tax point of view, an LLC is similar to an S corporation because business income and expenses are reported on your personal tax return. In the event you are the sole owner of an LLC, you are given "disregarded" status which means you have to report the income and expenses of the LLC on Schedule C of Form 1040.
Forming an LLC is potentially a good decision if you are a startup and anticipate losses for at least two years and you prefer to pass the losses through yourself and the partners. It's also a good choice if you need flexibility in management as it's easier to structure the business management.
Advantages of a Limited Liability Company
The LLC, not the members, are liable for the debts and liabilities brought about by the business. The members' liabilities are limited, which means that their personal assets are protected from legal action. There is no restriction on residency or citizenship which allows foreign nationals to own an LLC. Other corporate entities can be LLC members along with individuals or be the sole member.
The LLC has the ability to decide how it wants to be treated as a taxable entity. The IRS states that an LLC is federally taxed as a partnership by default, or as a sole proprietor. However, the LLC may elect to be taxed as a C- or S-corporation if the members so choose.
Disadvantages of a Limited Liability Company
Pass through taxation is a benefit, yet also a disadvantage in that the taxes are higher at the personal level than taxes at the corporate level. You will also be required to pay for federal inclusions such as Medicaid and Social Security. Additionally, you will have to keep careful records of business expenses, making sure they're kept separate from your personal finances. This is your only method of ensuring limited liability. In the event a member leaves the LLC, it is terminated and no longer exists even though the other members may wish to remain. A business checking account is required for LLCs, which can incur fees and monthly expenses, that may not be desirable.
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