Is an LLC Right for your Business?

Is an LLC right for you?

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The "owners" of an LLC are referred to as "members." All LLC members are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after an LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

 

Advantages of an LLC

·         Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC.

·         Less Recordkeeping. An LLC's operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.

·         Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit.

Disadvantages of an LLC

·         Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.

·         Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.

If you have questions and would like more information please contact us, we would be happy to help.

When beginning a business, you must decide what form of business entity to establish. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation.

Sole proprietors are unincorporated businesses. A sole proprietor owns and operates the business by himself or herself.  There are no forms you need to fill out to start this type of business. Business income and expenses are reported on your Form 1040 Schedule C.

Partnerships are unincorporated businesses. Like corporations, partnerships are separate entities from the shareholders. Unlike corporations, partnerships must have at least one General Partner who assumes unlimited liability for the business. Partnerships must have at least two partners. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

C-Corporations are incorporated businesses. The shareholders of C-corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain. Corporations must have at least one shareholder. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

S-Corporations are a type of corporation. The shareholders of S-corporations have limited liability protection, and the corporations has full discretion over the amount of profits they can distribute or retain. An S-corporation must have at least one shareholder, and cannot have more than 100 shareholders. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income, but S corporations are responsible for tax on certain built-in gains and passive income.

If you are interested in starting a business, contact us and we will help you decide what business form is right for you.

 

Darrington & Rodriguez, LLP