Define and document how your business will be run
Outline your business strategy
Keep track of important LLC information
Set forth a management plan for your LLC
Document how company shares are bought and sold
Set expectations among co-founders
Add a party to an existing agreement
Form an LLC FAQs
An LLC, also known as a limited liability company, provides a flexible compromise between a general business form and a corporation. It's one of the most adaptable of the business forms recognized in the United States, and it is one of the most popular for small business owners.
The owners of an LLC are called members. Members can be a single individual, a partnership, a group of individuals, or a corporation. Regardless of the number of members involved, an LLC automatically qualifies for pass-through taxation and enjoys limited liability. The owners of the LLC can choose to apply to be taxed as though the LLC were a corporation, depending on their preference. All requests must be made to the IRS, and they cannot be altered until the IRS gives a formal approval. The default taxation for an LLC is pass-through taxation. Most of the time, the base group decides the default taxation. In other words, if an individual forms an LLC, it is taxed as a sole proprietorship. If a partnership forms an LLC, it is taxed as a partnership. If a corporation forms an LLC, the LLC's earnings pass through to the corporation.
LLCs have to follow most of the requirements for a corporation, including keeping business accounts separate from personal accounts, maintaining records, and filing for or renewing licenses in a timely fashion. These requirements are laid out by state law. So long as they are met, the LLC members maintain limited liability. This means that even if the LLC goes bankrupt, the creditors can only reach the business assets instead of the owners' personal assets. This provides a significant incentive for individuals in partnerships or sole proprietorships since they do not enjoy this protection. The protection of limited liability may be lost, though, if the business owners act irresponsibly, illegally, or unethically in cases that must be proved in a court of law or an out-of-court settlement. For many businesses, though, the benefits and flexibility make it a better choice than other business forms.
An LLC is essentially a legal entity that protects its owners, directors, and officers from individual liability. Instead of the members of the LLC being held personally liable for negligent acts, the LLC will be liable.
Members of an LLC have asset protection. This means that the business's affairs and accounting are kept separate from the personal affairs and accounting of the members. You can't be held personally responsible for the company's debt or any other legal or financial liability. That is not the case for a sole proprietorship or a general partnership because assets are not considered to be separate under these two structures.
Forming an LLC has many benefits, not the least of which is limited liability. There could also be tax advantages, depending on how you file and the choices you make.
LLCs Provide Limited Liability Protection: LLCs are best known for the limited liability protection they offer. When the LLC is properly set up and maintained, the members and their personal assets are protected from liability in the face of lawsuits against the business. Unless you assign personal assets as collateral, they will also be protected if you need to declare business bankruptcy.
LLCs Offer Flexible Tax Options: LLCs get to choose whether the entity will be taxed as a corporation or as a 'disregarded entity.' Filing taxes as a 'disregarded entity' requires the LLC owner to pay pass-through taxes, which means they file their business and personal taxes together. When filing pass-through taxes, owners typically must also pay self-employment taxes. Filing as a corporation requires LLCs to file taxes specifically for the business. This will require a business owner to file taxes twice, once for themselves and once for their LLC. As business owners and businesses are all different, speaking with a tax attorney or accountant can help when choosing the right tax strategy for a particular LLC.
LLCs Require Less Paperwork: An LLC is one the easiest business structures to get up and running and to keep in good legal standing. This is because there is minimal government oversight and interference when compared to corporations. This results in less paperwork to file and reduced hassle.
Because the IRS doesn't consider an LLC to be a separate entity, it doesn't get taxed directly. You can actually choose how you wish to be taxed. These are the options:
Single Member: The company will be taxed like a sole proprietorship. The business will not be taxed directly. Instead, its profits and losses are passed through to your individual federal income tax return.
File as Partners: You may choose to be taxed like a traditional partnership.
File as a Corporation: You may choose to be taxed like a corporation.
Every LLC has an Operating Agreement that sets out who owns the LLC and how it will be run. Operating Agreements usually specify how the company will be treated for tax purposes.
You will need at least three documents.
First, you must file a document with the state in which you are setting up your LLC. This document is usually called Articles of Organization. Depending on the state, it could be called something different, such as Certificate of Formation.
Second, your LLC must have an Operating Agreement. This document sets forth who owns the LLC and how the LLC will be run. It is similar to bylaws for a corporation.
Finally, you will need an Employer Identification Number (EIN) from the IRS so that you can open a bank account and file tax returns.
Your state might require additional filings, such as a business license. But these are the three documents you must have in each state.
Owners of LLCs are called members. A single-member LLC is an LLC that has only one owner. The member could be an individual, another LLC, or some other entity, such as a corporation. An LLC can have managers if it wants. Members appoint managers to run an LLC. But the law does not require an LLC to have managers. Members can elect to run an LLC themselves. Unless the sole member of an LLC is simply an investor, it would not make much sense for a single-member LLC to have a manager. The sole member of the LLC could run the LLC.
Yes, you can. There are at least three ways to do this.
First, an LLC, like any other business, can have divisions or groups that engage in different kinds of business activities.
Second, an LLC can own another LLC or corporation that does a different kind of business than the LLC that owns it.
Finally, some states have enacted legislation allowing 'series' LLCs. A series LLC typically requires a single filing by the 'parent' LLC. It can add 'child' LLCs, too.
If a state allows series LLCs, and the parent LLC wants to engage in multiple businesses, then the series LLC might be the best choice. If an ordinary LLC wants to do more than one line of work, but one of its businesses fails and there is a lawsuit, then the assets of all the businesses the LLC owns will be liable to pay a judgment. However, in a series LLC, each 'child' LLC is treated as a separate entity. Thus, if one series fails, a creditor can recover only against that series. The other series LLCs would not be liable for the debts of the failed series.
An LLC is a "pass-through" entity which means that the LLC's earnings are taxed as income to the owners of the LLC. Because the LLC's earnings are passed through to the owners, the LLC itself does not pay taxes.
In contrast, a corporation suffers from being taxed twice. The corporation pays taxes on what it earns. In addition, the shareholders of the corporation pay taxes on dividends they receive from the corporation.
Pass-through taxation might be one advantage of organizing as an LLC as opposed to a corporation.
The answer depends on whether you are paying yourself as an investor or as an employee.
To pay yourself as an investor in your LLC, you would set up an account in your software for draws. You would simply issue checks to yourself consisting of LLC earnings that you wish to withdraw from your LLC. You would not pay Social Security or Medicaid taxes on these draws because income from investments is not subject to those taxes.
If you pay yourself as an employee of the LLC, you would set up payroll just as you would with any other employee. Your LLC would deduct Social Security and Medicaid taxes from your paycheck and withhold for income taxes.
Some LLC owners treat LLC payments as investment income even though they earned the income from working for the LLC. This practice allows them to avoid paying Social Security and Medicaid taxes. The IRS is attuned to this practice. If you are audited, the IRS will require you to pay Social Security and Medicaid taxes on the money you reported as investment income and will penalize you.
Sometimes, a hybrid situation exists: You work for your LLC, and the LLC pays you at a fair rate for your work. You would pay Social Security and Medicaid taxes on the amount that you earned. But if your LLC had additional income, you would report that as investment income.
Yes, an LLC can have employees, although early-stage LLCs organized for investment purposes normally don't yet have employees. Once investment LLCs receive sufficient funds, they do then typically hire employees because they have a need for them.
LLC owners are called 'members.' But an LLC organizer can elect to have either the members manage the LLC or appoint one or more managers. Managers are then responsible for running the LLC.
In small LLCs, often a manager is also a member and has few specific duties. In that case, the manager would not be considered an employee. But if the manager earns money by working for the LLC, such as by being put on salary, then the manager would be an employee as well as a member.
LLCs do not issue stock. Corporations issue stock.
A shareholder's interest in a corporation is shown on the corporation's books, which are authoritative. It is also common for corporations to issue physical shares, although they are not required to do so.
A member's interest in an LLC is set forth in the LLC's Operating Agreement. Some Operating Agreements list percentages of ownership, while others establish 'units' or some other way of measuring a member's interest in the LLC.
One of the advantages of an LLC is that there is great flexibility when the members decide how to set up their business. In contrast, corporations require more ownership formalities. There are many statutes governing corporations but few affecting LLCs.
An LLC can buy a house or own property. In fact, an LLC can own most of the things that a person can own. One of the few exceptions is that an LLC cannot be a shareholder in an S corporation. An S corporation allows pass-through taxation, like an LLC.
When an LLC is organized, the Articles of Organization or Certificate of Formation includes a clause authorizing the LLC to do business. If the members desire, they can restrict the LLC to doing certain types of business which might exclude buying a house or owning property.
Normally, however, the Articles of Organization or Certificate of Formation authorizes the LLC to engage in any business allowed by the laws of the state of organization. In that event, the LLC enjoys nearly all the same ownership rights as an individual does.