What is a LLC?
Of all the business structures out there, Here at R2F, we highly recommend choosing the LLC business structure for small or first time business owners. Having an LLC is a win-win company structure. First, it offers a company or business structure in which the owner has personal liability protection (as a corporation would). Second, it offers taxation benefits (as a sole proprietorship or partnership would). Third, an LLC is more simplistic in how it is created and maintained from a compliance perspective.
There are a variety of business structures. However, three among the most common are:
- Sole proprietorships
- General Partnerships
Benefits & Basics
- Structured in such a way that you as an individual and your personal assets are protected from any legal action against the company itself. *As long as there is no fraudulent behavior or criminal activity involved.
- Substantially less paperwork that may have been involved with a corporation, etc.
- Profits from an LLC go to the owner who then reports this income on their individual tax return. Thus, avoiding paying taxes twice (an LLC is not a separate taxpayer and doesn’t pay dividends; so the double taxation concept doesn’t apply) *Unless you elect to be treated as a corporation for federal income tax purposes.
- More formal/credible for clients; compared to a sole proprietorship or partnership.
Flexibility in paying income taxes is another benefit of having an LLC. One popular option is to utilize the S-corp or C-corp tax designation. You get to choose whichever is more attractive to you. With the S-Corp you are able to pay yourself a reasonable salary and avoid the 15.3% self employment tax on your dividends.
Flexibility in structure of the management and ownership. An LLC can be single or multi member. It can be managed by members; known as member-managed or it can be managed by a member appointed manager; known as manager-managed. Details about membership and management are to be outlined and explained in the Operating Agreement. LLC’s, unlike corporations are not required to have formal officers, a board of directors, annual meetings or hold records for company meetings and major decisions.
Flexibility in acquiring loans. As an established LLC, you now have the ability to build credit for your business. Getting credit established makes loans and other lines of credit more easily accessible. Depending on who you are and/or the nature of your business, you may be able to access specialized business loans!
Disadvantages to be aware of:
- Before personal taxes can be completed by LLC member(s), K-1 forms have to be distributed by an LLC. This often makes an LLC a less attractive investment opportunity for most investors.
- LLC owners are required to pay taxes on their portion of an LLC; whether or not they received a disbursement.
Where to form your LLC
There are varying schools of thought out there about how and why forming your business in certain states (ie. Delaware, Nevada, Wyoming) is advantageous. However, we recommend doing your research before following this trend. As a general rule of thumb, you should form a domestic limited liability company in the state where your business is located and will be operating within. Opening a business in one state and registering it in another can result in double the initial filing and maintenance fees. Now, you’re filing extra paperwork and paying substantially more than you would have if you registered in the state you will be operating within.
There are a few exceptions to this rule. If your business will be operating (have some kind of physical occupancy) in multiple states, registering as a foreign LLC is advantageous. In this instance, forming the business as a domestic LLC in the aforementioned states could benefit you.
Forming your LLC is relatively simple and will often entail five major parts.
First, select the state in which you would like to form your business.
Second, give your LLC a name.
Third, select a registered agent to work with.
A registered agent is a business or person who will send and receive legal documents on behalf of your LLC. In most cases, depending on your state, you are required to select one. We offer those services in all 50 states (enter hyper link for registered agent service)
Fourth, file and submit the incorporation documents for your state often known as Articles of organization.
An article of organization is the legal document filed with the state to form the LLC. It details general information about your LLC: name, purpose, and information about your registered agent.
Last, form an Operating Agreement.
An operating agreement is a legal document that outlines details about ownership, operation, membership and management.
Professional & Series LLC’s
Outside of domestic and foreign LLC’s, there are two other types of LLC’s: Professional and Series.
Professional LLC’s are aimed toward providing a professional service (ie. legal or medical). In order to be created, a professional LLC must include members who hold necessary licensure, certification or qualifications. In the case of malpractice, personal liability has no limitations.
Series LLC’s are more particular in how they are structured. A “parent” LLC gives limited liability protection to a series of businesses or “child” entities. This also means each business within this series is exempt from liabilities of other “child” businesses. This kind of business is currently only recognized in seventeen states:
Alabama, Delaware, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, North Dakota, Oklahoma, Texas, Utah, Wisconsin and Washington D.C.
Costs involved with forming an LLC varies depending on the state. A good ballpark estimate is between $50 and $500. In order to maintain your LLC, it averages around $100 per year. There may be more costs involved should you consult with a lawyer or professional. Please note: you don’t need a lawyer to form an LLC, this is optional.
Generally, processing time for an LLC can take about two or three weeks once the state receives proper documentation. Some stays may even offer same-day or express formation for an additional fee.
Profits made by the LLC go to its members. Members will then pay taxes on their share of any earnings via their individual tax returns. LLC’s with multiple members will file an earnings report annually to the IRS via form 1065.There are also state level taxes to consider.
Depending on the state, this can take the form of an annual fee or percentage of annual earnings.
Unemployment Tax & Income Withholding Tax
If the LLC has employees, registering for Unemployment Insurance Tax and Income Withholding Tax is necessary.
All taxable goods and services offered by the LLC require the business to apply for a seller’s permit and collect sales tax for the state.
LLC’s do not have shareholders. They also are not able to sell shares via the stock market. The LLC is owned by its members. If there are multiple members, information about how earnings will be divided should be outlined in the Operating Agreement.
LLC Member Payment
This all depends on how it is taxed, the number of members and profit sharing/sweat equity agreements. This can be done via:
- Via an individual tax return as a distribution.
- A salary and distribution (as an S corporation).
Still have questions? Ask Us!