A Limited Liability Company, or LLC, is a popular business structure in the U.S. It combines the merits of Partnerships and Corporations, and also comes with some unique features of its own. For instance, LLCs enjoy the tax benefits of general Partnerships and limited liability of Corporations.
But LLCs are not as simple as they sound. Let’s learn a bit more about them.
How Are LLCs Formed?
One of the main benefits of structuring your small business as an LLC is that it’s relatively simple to form.
To start, you need to select a unique name for your LLC. Some states have public databases with registered LLC names that you can check for name availability. Your chosen name should indicate clearly that the company is an LLC too. This is typically done by adding the word “LLC” at the end of the company’s name.
Once you decide on the name and check its availability, you need to file Articles of Organization with the Secretary of State and get a Federal Tax ID from the IRS. Luckily, this formation process can be easily completed online with services like GovDocFiling, where both state and federal filing requirements are taken care of by filling out one simple online application.
You should also create an Operating Agreement that governs how roles and profits will be split between multiple members. You may also need to procure necessary permits and licenses before starting out. A one-time setup fee is also applicable to form LLCs and many states have recurring yearly fees per LLC too.
Advantages of LLCs
LLCs exist as separate entities. Thus, the members can’t be held for their liabilities.The owners’ assets cannot be dissolved to fulfill the obligations and debts of the business. This safeguards LLC owners from business creditors to some extent.
Another advantage is that LLCs enjoy a flexible tax status. They are pass-through entities so the income earned in the business is passed through to the individual’s personal tax return for a single-member LLC. This saves you from double taxation, which is a characteristic of corporations.
Yet another advantage of LLCs is that you don’t require any formal records of meetings. This makes it easy to maintain them.
Disadvantages of LLCs
While LLCs are easy to set up, they don’t last forever, as corporations do. In fact, many states require LLCs to be dissolved if any of the members change or die.
Additionally, the tax benefit of LLCs can be a double-edged sword. Members of multi-member LLCs are required to pay self-assessment tax unless the LLC is taxed as an S-Corp. Self-employment tax is a federal tax, which includes social security and a Medicare tax. The cumulative tax amount can negate the tax benefit that LLC members enjoy.
When you choose to get taxed as an S-Corp, the members become employees of the LLC and earn a W-2. The LLC is then taxed as an S-Corp and will be subject to corporate taxes.
There’s a lot more to LLCs than just this. To understand more about their advantages and disadvantages, check out this infographic by GovDocFiling which explains all essential LLC-related facts. Take a look:
Image Courtesy: GovDocFiling
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
