LLCs (Limited Liability Companies) are becoming a more popular business entity for new companies. The LLC combines the limited owner liability of a corporation with the tax efficiency and flexibility of a partnership. Here, we take a look at what it is and how it compares to other business entities.
Owners – Owners of LLCs are called members. Members can be individuals, companies, or foreign entities.
Taxes – By default, an LLC is not taxed as a business entity. See “Taxing the LLC” for more.
Liabilities – members are typically not directly liable for the debts of an LLC.
Record Keeping – LLCs are required to submit annual state reports but aren’t required to hold annual shareholder meetings.
Management – LLC operation is flexible like a partnership. An operating agreement isn’t required but is recommended.
Taxing the LLC
To the federal government, an LLC is not a separate tax entity, so the business itself is not taxed. Instead, federal income taxes are passed through to members and paid through their personal income taxes. However, LLC must be classified as a corporation, partnership, or sole proprietorship by the appropriate annual return forms an file the appropriate return.
Weighing – The Pros & Cons
Compared to corporations, partnerships, or other business types, LLCs have a few key advantages and disadvantages.
- Fewer ownership restrictions
- Limited owner liability
- Less record-keeping
- Better profit-sharing
- Tax flexibility
- Owners subject to self-employment taxes
- Limited life if a member leaves
- Higher taxes and fees in some states
- Fewer benefits like group medical insurance
Setting Up an LLC in 8 Easy Steps
1. Choose a Name
The business name should follow these three guidelines:
- Must be different from an existing LLC in the state
- Must indicate it’s an LLC
- Must not include words restricted by your state (such as “bank” or “insurance”)
2. Get Registered:
Some states require more registration forms than others.
3. Draft an Operating Agreement:
Though not requires in all stated, they’re recommended. Include the following details:
- Member’s percentage ownership
- Rights and responsibilities
4. Get Licenses and Permits
You’ll need different business licenses and permits based on the industry, state, and the locality once the business is registered.
5. Seek a Lawyer’s Approval
A lawyer isn’t required to set up an LLC in most cases, but its’s good to have one look over paperwork and the agreement.
6. Get it in Writing
Document major proceedings or procedures (such as an annual meeting) to help protect LLC status.
7. Announce Your Business
Some states required LLCs to publish a statement of formation in the local newspaper.
8. Learn The Fees
Stay up-to-date on what you can expect to pay in taxes and annual fees, which can vary dramatically by state. Work with an accounting professional to help you stay on top of everything.