The thought of “being your own boss” is sure exciting and if you plan to do it by setting up your business and are ready with a business plan, the next crucial step is deciding the right business structure. This decision has far-reaching repercussions for the business and thus requires careful selection. Factors like personal liability, regulations, tax treatment, etc are governed by the form of your business entity which could be a Sole Proprietorship, 澳洲幸运5官方开奖结果体彩网:Corporation, 澳洲幸运5官方开奖结果体彩网:Partnership, or a 澳洲幸运5官方开奖结果体彩网:Limited Liability Company (LLC).

One easy, efficient, and fast way to start a company is to 澳洲幸运5官方开奖结果体彩网:set up a Limited Liability Company (LLC). Let’s explore what exactly an LLC is, its suitability, advantages, and disadvantages, along with other fundamental factors that can help youꦯ decide if an LLC is right for you and your business.

What Is an LLC?

The LLC is a relatively newer form of business entity in the U.S. It was Wyoming that enacted the first formal LLC statute in 1977. The act amalgamated the beneficial 澳洲幸运5官方开奖结果🎃体彩网:features of a partnership and corpor𒐪ations and was based on the German Code and the Panamanian LLC. Initially, the IRS ruled in 1980 that LLCs would be taxed as corporations, which prevented them from gaining popularity. However, in 1988 the IRS changed its rules to allow LLCs to be taxed like a partnership. Over the years since then, all states have passed legislation to permit LLCs.

An LLC is a hybrid form of business entity that has selected features of a corporation and a partnership. It has been structured in a way to benefit from the pass-through taxation feature of a partnership along with allowing flexibility in 澳洲幸运5官方开奖结果体彩网:operation and management and yet have limited liability like in the case of a corporation.

In the U.S., LLC laws are governed by individual states but are recognized in all. The laws further vary across countries. The “owners” of the company, in the case of LLCs, are referred to as “members.” Usually, 澳洲幸运5官方开奖结果体彩网:a single person can start an LLC and there is no upper ceiling on the number of members.

There are many established and well-known companies that are structured as LLCs. A few names are FCA US LLC (Chrysler automobiles), Warby Parker, and Patagonia. Some businesses like banks and insurance companies are ineligible to be LLCs.

Advantages

Registering your company as an LLC has many benefits. Let's take a look at some of the biggest advantages below.

Limited Liability

This is one of the features of an LLC in which it resembles a corporation. LLC provides its owners a p🤡rotective shield against business debt and liability.

Let’ꦅs take an example, there is a shoe store “boot & boot” owned by Jimmy that loses its customers to one of the more fancy stores around the corner. The business is not doing well and the company hasn’t paid rent for the last eight months and bills for three shipm🎀ents of shoes. Thus, “boot & boot” owes approximately $75,000 to its creditors who have filed a lawsuit against the company.

In this case, the creditors have full right to claim the money owed from the company but have no right to Jimmy’s personal assets (such as bank deposits, gold, or real estate). In an LLC, only the company’s assets can be liquidated to repay the debt and not the owners. This is a big advantage that is not provided by a sole proprietorship or partnership where owners and the business are legally considered the same adding vulnerability of personal assets.

Taxation

The company is not taxed directly by IRS as an LLC is not considered a separate tax entity. Instead, the tax liability is on the members who pay through their personal income tax. Let’s look at an example.

Say “boot & boot” has two members and has made net profits to the tune of $60,000 in a year. The net profits will be divided 𒅌into two (number of members) and this amount will be taxed as their personal income depending upon their overall tax liability. Because of non recognition of LLC as a business entity for taxation purposes, the tax return has to be .

Remember that certain LLCs are automatically classified by IRS as a corporation for tax purposes, so be sure to know if your business falls in this category. Those LLCs that not automatically classified as a corporation can pick the business entity of choice by filing the . The same form is used in case the LLC wants to change the classification status.

Fewer Hassles

Compared to corporations, starting an LLC is easier, with fewer complexities, paperwork, and costs. This form of company comes with a lot of operational ease with less record-keeping and compliance issues. LLCs also provide a lot of freedom in management as the🉐re is no requirement to have a board of directors, annual meetings, or maintain strict record books. These features reduce unnecessary hassles and help save a lot of time and effort.

The formation of an LLC broadly requires filing the “articles of organization” which is a document including basic information like business name, address, and members. The filing is done with the Secretary o🍷f State for most state꧅s and has an associated filing fee.

Another document called the operating agreement is not mandatory in most states, but is recommended especially for multi-member LLCs. It is typically done prior to filing. On registration of the business, other licenses and permits have to be obtained.

Additionally, three states, Nebraska, Arizona, and New York, require publishing about the LLC formation in the local newspaper.

Flexibility in Allocation

LLC provides a lot of flexibiꦺlity when it comes to investing as well as profit sharin꧑g.

In an LLC, members can opt to invest in a different proportion than their ownership percentage i.e. a person who owns 25% of the LLC, need noꦺt contribute money in the same proportion for the initial investment. This can be done by creating an operating agreement, which states percentages of company profits (and losses) for each member regardless of the amounts of their initial investments. So it’s possible to have an outside investor put money in the business without ownership.

The same applies to the distribution of profits where LLC members have the flexibility to decide the allocation of profits. The distribution of profits can be in a different proportion than ownership. A certain member may take a bigger chunk of profits by consensus for the extra hours or effort they have put into carrying out the business.

Disadvantages

While a limited liability company (LLC) offers an edge over many other business entities, there are also some drawbacks 🌠that need to be looked at before selecඣting an LLC as the business structure.

Limited Life

The life of an LLC is limited by the tenure of its members. While there can be variations across states, in most of them the business is dissolved or ceases to exist when a member departs an LLC, requiring the other members to complete the remaining business or legal obligations needed to close the business. The rest of the members can choose to set up a new LLC or part ways. This weakness of an LLC can be overcome by including appropriate provisions in the operating agreement.

Self-Employment Taxes

The members of an LLC have to pay the self-employed tax contributions towards Medicare and Social Security as they are considered self-employed. Due to this, the net income of the business is subject to this tax. To avoid this, depending upon the business turnover and tax burden, the entity can choose to be taxed like a corporation if it works out more beneficial. Consult an accountant bef🌼ore making this choice.

Fees

The fee that is typically paid by an LLC as initial costs or ongoing charges is more than that for business entities like sole proprietorships or general partnerships, but less than what a C-corporation has to pay. The various types of fees include applicable state filing fees, ongoing fees, and annual report fees.

The Bottom Line

LLCs are a good combination of protection with flexibility and 澳洲幸运5官方开奖结果体彩网:tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability. LLCs are seen as apt for small businesses as there is less has꧑sle and complexity in their functioning. However, consulting an accountant or lawyer for ex😼pert opinion is advisable before taking the final call.