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The limited liability company (LLC) is a relatively new and highly popular alternative to the five more traditional business structures (i.e., Sole Proprietorships, C Corporations, Partnerships, Limited Partnerships and S Corporations). The LLC is a type of business ownership structure which allows individuals (through Single-Member LLCs) and small groups to enjoy limited personal liability while operating under partnership-type rules that are more commonly associated with corporations. The “limited liability” is the feature it shares with a corporation and pass-through income taxation is what it shares with a partnership or sole-proprietorship.
Advantages of a Limited Liability Company
One reason many turn to an LLC is due to its inherent flexibility. There are numerous advantages to forming an LLC to include:
- LLCs have a variety of ways to be taxed: as a sole proprietor, Partnership, S Corp, or C Corp.
- You can enjoy the limited liability feature of a corporation. You and partners are protected to a certain extent from the LLC’s liabilities.
- Less administration and record keeping as compared to a corporation. Fortunately, LLCs aren’t required to generate a lot of paperwork, but you will need to create some basic records and follow a few corporate formalities which will help maintain the LLC’s distinction as a separate and independent legal entity.
- Can be run by one person. A single-member LLC can be formed under state laws and regulations and pay taxes as a sole proprietorship.
Disadvantages of a Limited Liability Company
Although the advantages are many, there are some disadvantages to consider as well:
- Harder to raise financial capital from investors.
- Some states impose a franchise tax or capital values tax on LLCs.
- Some states have renewal fees as high as $200/yr.
- You’re not 100% protected from the LLC’s debts – some creditors require owner(s) to sign personal guarantee.
Generally, an LLC is not considered separate from its owners, for tax purposes. Unless an election is made to be taxed as a corporation, LLCs are taxed as a “pass-through” entity wherein all of the LLC’s profits and losses “pass through” the business and are allocated and taxable to the owners at the end of each LLC year. Thus, the owners, not the LLC itself, are responsible for reporting income from the business on their individual returns.
- Single- Member LLCs do not have to prepare and file any tax returns on behalf of the LLC. The owner simply files their regular 1040 Form and attached Schedule C, Profit and Loss From a Business, to report their share of allocated LLC profits or losses, and Schedule SE, Self-Employment Tax Return, to figure the self- employment (Social Security and Medicare) taxes owed.
- Co-Owned LLCs must file IRS Form 1065, an informational return, with the IRS each year which reports the income, losses, credits and deductions allocated to all eligible Members. The LLC must also provide a completed Schedule K-1 Form for each owner, on which it reports the profits, losses, credits and deductions allocated to each owner. Each Member then uses the Schedule K-1 to prepare and individual tax return for the year and the attaches a copy of it to their regular 1040 Form.
Invest in your future by giving your business all the legal protection, potential tax benefits and the credit profile of a Corporation or a Limited Liability Company. Today, you can start your own LLC with ICS in just a few simple . Visit us at: www.Mycorporatesolutions.net where we make the entire process smooth, quick and affordable.
Here’s To Your Success,