Why LLC: Everything You Need to Know
Why LLC? An LLC gives you certain liability protections and a flexible management system.3 min read
Why LLC? An LLC gives you certain liability protections and a flexible management system. You must choose the right legal entity because it has long-reach ramifications that could benefit or hinder your business goals. Your choice of legal entity determines:
- Your tax structure
- Personal liabilities
- Regulation types
Despite the effects of the Great Recession, more people remain optimistic about the business climate within the United States, and small business owners can take advantage of an LLC structure to maximize profit. Regardless of your industry, you can form an LLC structure, but you should know the advantages and disadvantages before registering in your state. For instance, one advantage is that LLCs give business owners more credibility in the eyes of consumers and potential business partners.
When compared to partnerships and sole proprietorships, business owners should choose an LLC because an LLC offers more legal protections. With that, not all small business owners are at a place where an LLC registration would make the most sense. In fact, owners can start as a partnership or sole proprietorship and transition into an LLC structure when ready.
When it comes to corporations, LLCs offer more managerial flexibility, but LLCs provide the same protections as a corporate entity. Moreover, LLCs provide tax flexibilities and fewer formal requirements. On the other hand, LLCs are open to self-employment taxation, which tends to be very high.
In comparison to limited partnerships, LLCs provide liability protections to all members, while LPs only yield safeguards to certain partners. For instance, one partner in an LP could be fully safeguarded, while other members would be exposed to legal risk.
LLC Tax Options
The IRS does not tax LLCs as a separate entity. This means that the IRS will not tax an LLC directly, but it will tax it in the same manner as other legal entities. Essentially, this means that LLC owners can choose how they can be taxed. You may choose from the following tax options:
- Sole-member LLCs: This structure faces taxes in the same way as a sole proprietorship. Losses and profits from the entity do not get taxed, but are taxed on a sole member’s personal tax return.
- Multi-member LLCs: LLCs with more than one member are taxed in the same manner as a partnership.
- Corporate LLCs: LLCs may choose two corporate tax classifications: S or C. A C corp structure is the standard corporate classification for all corporations. LLCs may choose such a classification, but it comes with a rigid management structure, and the LLC must pay business taxes. On the other hand, an S corporation does not require the LLCs to pay business income taxes, and an S corp allows members to characterize income if they perform direct work for the LLC, thus allowing them to reduce high self-employment tax balances.
LLCs can create any management structure that all members agree to. An LLC may be governed by owners or managers. This is not the case with corporations, where a board of directors reside over major decisions of the business, and officers must manage everyday matters of the corporation. Moreover, LLCs come with few restrictions when compared to corporations.
In regards to S or C corps, LLCs remain flexible, especially pertaining to operating agreements. Operating agreements are not mandatory in most cases, but you should write one to form a cohesive management structure within your LLC. An operating agreement should have the following essentials:
- Voting system
- Profit distribution plan
- Roles and responsibilities
- General operating procedures
You may tailor your operating agreement and management system to how you see fit, which is not the case with a corporate entity. If you do not have an operating agreement for an LLC, your business may be regulated by the default rules of your state.
In regards to LLC creation, you need to submit your articles of organization and pay a filing fee, which varies on the state you live in. Filing fees usually amount to $100. You may also file online, and you normally you need to register your LLC at the secretary of state office in your state. After registering your LLC, you would need to submit annual reports about your LLC and pay the appropriate annual fees.
Why LLC? To find out more if an LLC is the right fit for your business, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from some of the best law schools in the nation and will help you determine if an LLC suits your business needs. Moreover, they will help you choose another legal entity if an LLC is not right for you.