You have probably heard the term LLC, but you may be wondering what this phrase means. Short for limited liability company, an LLC is a business structure that establishes your business as a separate entity from you personally. Keep reading to learn more about the formation, operation and taxation of these business structures.
Important things to know about LLCs
- What Is an LLC and How Does It Work?
- What Are the Benefits of Having an LLC?
- What Does an LLC Protect You From?
- How Do I Form an LLC Online?
- Do I Need an EIN Number for an LLC?
The first question most people have is, “What is an LLC and how does it work?” In short, an LLC is a business structure in which the members of the company are not personally responsible for any company debts or liabilities. If there is a catastrophic event that hits the business, such as a lawsuit or a bankruptcy, the assets of the members cannot be seized to repay debts and other obligations incurred by the company’s legal battles.
An LLC is very similar to a corporation, but while corporations are taxed separately from individual owners, LLCs let their income flow from the business directly to the individuals. In other words, if you have an LLC, you pay your personal income tax rate rather than a corporate income tax rate on your profits. This setup helps to avoid double taxation. Usually, corporations pay corporate income tax on their profits, but then, when the dividends pass to shareholders, they face personal income tax. With a flow-through entity such as an LLC, the income is taxed only once at the owner’s individual tax rate for earned income.
An LLC can have an ownership structure or a management structure. With an ownership structure, the owner is referred to as a member. If there’s just one owner, it’s a single-member LLC, but if there are two or more owners, the LLC is considered to be a multi-member. Under the management structure, managers handle the daily operations of the business.
Typically, LLC members are the major decision-makers while the managers do the day-to-day tasks. A member-managed LLC has members who are also managers, and that tends to happen with relatively small LLCs. If non-members are managers, the LLC is considered to be manager-managed, which is more prevalent in larger, multi-member LLCs.
With so many different business structures to choose from, you are probably wondering, “What are the benefits of having an LLC?” Compared to a sole proprietorship and a corporation, this business structure offers a variety of benefits. In addition to limiting your personal liability and offering the tax advantages mentioned above, LLCs offer the following benefits:
- An LLC avoids many of the requirements of a corporation and offers limited liability protection for the owners.
- Owners’ personal assets like their home, car or personal bank accounts are generally not subject to attachment to pay business debts or lawsuits against the business.
- You can have an unlimited number of members.
- If you have just one member, the LLC is taxed as a sole proprietorship.
- You can use special allocation of profits – this refers to the disproportionate splitting of member profits and losses with the owner so that members can receive profits and write off losses in excess of their individual ownership percentage.
- Managing members share of profit is counted as earned income because managing members are considered to be active owners.
- Members can be paid by using distributions of profit or guaranteed payments. With distribution of profits, members can simply write themselves a check from the LLC.
- The LLC’s managing member can deduct 100 percent of health insurance premiums paid, up to their prorated share of the LLC’s net profit. This rule only applies because the profit is considered earned income.
- A corporation can be a member of an LLC, giving you the ability to create an additional level of ownership in your company.
- As a member, you can contribute capital or other assets to the LLC, and you can also loan money to the LLC. Then, you can take money out of the company to repay the loan, and you can pay yourself interest.
- Generally, an LLC is not required to hold annual meetings of members or to keep minutes of any other meetings.
- If any members of the LLC die, it can continue to exist, subject to the unanimous positive vote by all remaining members.
Why You Should Form an LLC?
Wondering why you should form an LLC? In addition to the critical tax breaks, LLCs are attractive because they earn the same limited liability protection as corporations, but they avoid many of the more tedious record keeping and other formalities that corporations must follow. An LLC is a nice middle ground between a sole proprietorship and a corporation.
An LLC provides strong protection to the personal assets of its members and managers. Unlike a sole proprietorship or partnership, owners cannot lose personal assets in a business lawsuit. For instance, if someone is hurt on your LLC’s property, the injured party can bring a lawsuit against your business. Your business’s insurer may have to make a payout, and in some cases, other assets that the business owns may be used to cover the claim. However, you don’t have to worry about losing any of your personal assets.
A lot of new business owners wonder, “How do I form an LLC online?” To get an LLC online, you should work with a professional service. They can guide you through the process of filling out the forms, they can answer your questions, and they can ensure that you obtain your business structure as quickly and easily as possible.
Yes, you do need an EIN (Employer Identification Number) if you plan to hire employees for your LLC. You also use the EIN to file sales tax returns and for a variety of other federal government documents. When you apply for your LLC online, you can also work with that same professional to get your EIN number.