The legal entity that you choose for your business affects your personal liability, how you pay taxes, and the regulations that apply. One of the most common business formations is the Limited Liability Company (LLC).
LLCs have many similarities with C-Corporations, but in general they are more flexible in terms of taxation and require less paperwork. This article examines the overall advantages of LLCs to help you decide if it’s the right business structure for you.
Flexible Taxation
LLCs are not regarded as distinct and separate entities for tax purposes, so the IRS does not tax them directly, however you may have to pay a state tax on them. Members of the LLC decide the tax route the business will take. Options include:
- Single member LLC: This type typically is taxed the same way that sole proprietorships are. Profits and losses are taxed via the single member’s own federal tax return.
- LLC partnership: The business is taxed like a traditional partnership.
- Corporation: The LLC files as if it was a corporation.
LLCs generally cover taxation approaches in their Operating Agreements, but members should be aware that the IRS automatically classifies some LLCs as corporations. Further information can be found on the IRS website.
Reduced Paperwork
Setting up and maintaining an LLC is easier and requires less paperwork than other business entities. Registration consists of filing articles of organization with the relevant state office and paying a fee. Corporations, on the other hand, need to file articles of incorporation with the applicable state division and follow other requirements, such as convening an annual shareholders meeting and filing annual reports.
Limited Liability
LLC members usually are not personally liable for debts incurred by the company. (This protection often applies to court judgments as well.) Creditors may not seize the personal assets of LLC members, an advantage not available to sole proprietors or those in a traditional partnership.
Flexibility in Profit Sharing
Business entities usually distribute profits based on an owner’s percentage of ownership or their capital contribution. LLC members have the flexibility to decide how profits and losses are distributed under the terms of their operating agreement.
LLC members are not limited to their proportion of ownership, but may decide to divide up profits in a different manner. For example, one member may agree to take less than her proportional share in profits if another member agrees to put in extra hours and efforts toward the LLC’s daily operations.
LLCs offer an appealing combination of protection and flexibility. They protect members from personal liability while offering a variety of taxation and profit sharing options. If you have further questions about LLCs or about business organization in general, please give me a call today!
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