Choosing an entity structure for your business is not an easy call. You have a lot of options to choose, but LLCs are one of the most popular. We’ll cover LLC advantages so you can decide whether an LLC structure is the best option for your business..
What is an LLC and How Does it Work?
LLC stands for limited liability company. An LLC is one of the most simple ways to structure your business and allows the business owner to protect their personal assets. Nobody wants to think about bad business dealings and what could happen if someone decided to sue your business. However, failure to do so could leave your personal assets at risk. An LLC effectively separates your personal assets from your business so that your personal assets are not vulnerable. In the event you end up in a legal battle, things like your home and personal vehicle are off the table.
LLC owners are called members. There are single-member LLCs for businesses with only one owner, and multi-member LLCs for businesses with more than one owner. One of the biggest LLC advantages is its simplicity of set up, which involves selecting a state to file, choosing a business name, designating a registered agent, filing articles of organization, and creating an operating agreement. We will go over more of this in detail a little bit later.
Tax Advantages of LLC
One of the biggest tax advantages of an LLC is pass-through taxation. Pass-through income goes directly to the LLC owners, so taxes are much simpler. As opposed to corporations, there are no additional taxes on LLC revenue. Income passes through to the members and they pay taxes on their individual returns. This allows LLC owners to avoid double taxation.
What are the Disadvantages of an LLC?
LLC members must pay taxes on their share of the income when it is earned, even if they never took any money out of the business. In addition, LLCs with multiple members have to issue K-1 forms before its member can file their taxes. This can make the members’ taxes much more complicated.
How to Create an LLC
As we mentioned above one of the biggest LLC advantages is the ease of setting one up. Start-up costs are usually pretty low, so its an affordable option for many growing businesses. In most cases, you can complete the entire process online. LLC registration costs vary by state, so visit your state’s website to learn more about local startup costs and administrative fees. Have all your information ready before you start so you can get the answers you need.
Choose a State
The first step in setting up an LLC is determining which state you want to file your LLC. In most cases, setting up your LLC in your home state is going to make the most sense. However, if you conduct business in multiple states where you have a physical presence, you will need to file as a foreign LLC. Remember each state has different tax laws, so you should research local regulations before you choose.
Consider startup costs and annual fees before choosing a state for your LLC. You should also consider a state’s track record for honoring LLC owners’ liability protection. Some states have more comprehensive liability protection than others. You don’t need to have a residence in a state to open an LLC there, but you will most likely need a local registered agent if you go out of state. Registered agents charge a fee for their services, so this is another cost to consider. If you’re lost, you should consult with an accountant that specializes in state and local taxes for direction.
Pick a Name
Before setting up your LLC, you will need to know your business name. While each state may have certain preferences for business names, here are a few general guidelines; the name must include limited liability company or LLC, you name cannot include words that sound like a government agency like FBI, and you will want to avoid using restricted words like bank, attorney, and university as these may require extra paperwork.
Choose a Registered Agent
A registered agent is a designated person or entity who receives legal papers for your LLC. Registered agents must reside in the state where your LLC is established. You also need one in every state where you do business. You can be your own registered agent, or you can hire a professional service to handle it. The main requirement is that the agent is available to receive legal notices during business hours.
Draft Articles of Organization
Articles of organization lay out the terms for establishing your LLC. They include the business name, registered agent, and ownership structure. This document also specifies the LLC’s management structure. You can usually file there forms out online. Filing articles of organization will result in a fee, which varies from state to state, and you will need to get them notarized.
Draft an Operating Agreement
Not all states require you to have an operating agreement however it is always a good idea to have one. An operating agreement outlines the LLC’s structure, including its members and their roles. It also outlines the LLC’s management guidelines, financial responsibilities of members, and profit shares. The operating agreement can also establish a process for adding or removing members and typically requirements for dissolving the LLC.
File with Your State
Once you are ready, you can file with your state. In many states, you can do this online. Fees for filing for your LLC will vary from state to state. Once you file for your LLC, you will receive an EIN or Employer Identification Number, which acts as a social security number for your business.
Should I get an LLC for my Small Business?
Many small businesses find that they can benefit form LLC advantages. We’re not attorneys so we cannot tell you if establishing an LLC is the right call for your business. However, we’re happy to answer your LLC tax questions. Talk with a Shared Economy Tax expert today for more information on how an LLC can impact your tax situation. Get started now with a one-on-one strategy session with one of our tax pros. You can also sign up for our complimentary tax tips newsletter using the form below.