What is an LLC?

What is an LLC? Is an LLC a business entity? A Limited Liability Company can be a great way to grow a small business. It offers limited liability, something that can be helpful to its members.

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While this type of business organization can offer a lot of benefits, like limited liability protection, there are some drawbacks you’ll want to know about. Here’s what you should know, how to form one, and more information. 

What is an LLC?

An LLC is a business entity type that offers owners, called members, limited liability. The qualifications are very broad: corporations, foreign entities, individuals, and other LLCs can join a Limited Liability Company. 

It is important to note that an LLC can have an unlimited number of members. It is also possible to have a single-member LLC as well. 

Do You Need One?

You may need a Limited Liability Company if you want to form a business entity that: 

• Allows you to form as a single member
• Has no maximum number of members
• Has the flexibility to file and pay taxes as other business entity types

 

What are the Benefits?

Forming an LLC has several benefits, which include: 

• A choice between manager-managed or member-managed
• Limited liability
• Fewer paperwork requirements 
• Flexible profit and loss allocation
• Tax status flexibility

LLCs can operate as either a manager-run or member-run company. In manager-managed LLCs, members select managers to operate the business. These managers will conduct work for the company.   

In member-managed LLCs, owners will have a role in daily operations.  All members share limited liability, meaning they aren’t personally liable if the company experiences legal trouble. 

Another benefit is the paperwork requirements. While other business entities require annual reports, board of director meetings, and state requirements, LLCs don’t have as many required forms of upkeep. 

Fourth, profits and losses can be split in several ways. Members will agree to the terms of profits and losses in the Operating Agreement. 

LLCs also have greater flexibility when it comes to tax status. They can experience taxation as a general partnership, meaning members will complete a Schedule K-1 to report profits and losses. 

What are the Disadvantages?

Even though there are several benefits, there are also disadvantages. 

In many states, if a member leaves an LLC, it must dissolve. The remaining members can start a new multi-member LLC, but those members will pay a termination fee. 

Members must pay a self-employment tax if they file taxes as a general partnership. These members will be considered self-employed. As a result, these members will pay a self-employment tax. 

How to Start an LLC

If you want to start an LLC, there are a few things that you’ll need: 

• Articles of Organization (to submit to your Secretary of State)
• Business name (that is both available and unique)
• Licenses and permits (which will vary by industry and state)
• Newspaper notice (not a requirement in all states) 
• Operating Agreement 
• A registered agent (to receive legal documents) 
• Tax registrations

 

How to Convert to an LLC

You can convert your business entity to a Limited Liability Company if your business is: 

• A C-Corp
• An S-Corp
• A sole-proprietorship

First, you can convert your C-Corp by doing the following: 

• File Articles of Organization (required in most states) 
• File an Operating Agreement (contact your state’s Secretary of State)
• Dissolve the C-Corp:
  • File and write the C-Corp’s Articles of Dissolution 
• Transfer assets

Another option you can consider is converting your S-Corporation to an LLC. To do this, you’ll: 

• File necessary paperwork
  • The exact paperwork and requirements will vary by state.
    • Some states may want you to send paperwork to the Secretary of State before converting your business. 
    • Other states may require your LLC to merge with the S-Corp and name your LLC as the surviving company. 
• Liquidate assets for S-Corp and return them to shareholders.
  • After LLC receives state recognition, the S-Corporation shareholders will contribute to LLC’s assets. 

A third option you can consider is converting your sole proprietorship. You’ll do this by: 

• Checking the availability of the proposed name 
• File Articles of Organization (required in most states) 
• File an Operating Agreement 
• Obtain an Employer Identification Number 
• Transfer assets 

Differences between LLC, S-Corp, C-Corp, and Partnerships

If you want to form an LLC, you may want to know how it compares to other business entities. S-Corps, C-Corps, and partnerships have distinct advantages; learn more about how they stack up.

C-Corps

C-Corps and LLCs differ in important ways. First, C-Corps experience double taxation. 

This means that taxation occurs once when the corporation’s income experiences taxation and again when members, called shareholders, experience taxation again on individual income. 

LLCs don’t pay income taxes, but the members pay self-employment taxes. C-Corps experience double taxation, but shareholders don’t pay self-employment taxes.

Partnerships

While LLCs and partnerships may seem similar, there are some crucial differences. LLCs operate under an operating agreement that defines members’ percentages of ownership. Members will pay tax individually after profits are passed to its members.

Partners in a partnership share profits and losses of the business according to the percentage of their share. Partners will complete a partnership agreement before forming their partnership. 

While a domestic LLC offers limited liability to all members, partners in partnerships have personal liability.

S-Corps

Finally, while an LLC has few member requirements, an S-Corp is different. An S-Corp must have a board of directors and corporate officers, two things not required with an S-Corp. 

Second, S-Corps have a limit of 100 shareholders. An LLC has no limit to the number of people who can join.

Another difference is how long the business entities can exist. LLCs dissolve after their member or LLC owner leaves the company. S-Corps will continue if its shareholders leave the corporation.

Which business entity is right for you

Have you been dreaming about starting your own business? That’s wonderful! Becoming an entrepreneur can be an exciting and fulfilling journey. But where do you start? There is a lot to think about when establishing your new business. 

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One of the first steps for many business owners is setting up their business entity. What is the legal business structure of your company going to be? 

Whether you’re a rideshare driver, a ral estate professional, or a graphic designer, setting up your business entity is a critical decision. It will shape the way you make decisions about your business, and it will shape your personal and professional liability and your tax liability more generally.

What is a Business Entity? 

A business entity is an organization created by one or more people to be a business to engage in a service or trade. It describes the legal status that the business has as an entity for purposes of taxes and regulation. When various levels of government look at your business, what will they see, and how will they interact with your company?  

Business entities are formed at the state level, usually by filing documents with a state agency, such as the Secretary of State, and picking a registered agent to handle communication with the state. They’re often subject to taxation, so the business owners must plan on bookkeeping and filing a tax return for their businesses.

The type of business entity determines a lot about your tax status and other financial liabilities. There are five main types of entities that your new business could be: 

1. Sole proprietorship
2. Partnership
3. S corporation 
4. C corporation
5. Limited liability company (LLC)

 

What Are Your Options When It Comes to Entity Formation?

Sole Proprietorship

A sole proprietorship is one of the simplest business entities an entrepreneur can start. In fact, if you make any money as a self-employed individual, you have technically already started a sole proprietorship — maybe without even realizing it!

This entity type requires few forms for set-up, and only one owner exists. That means all decision-making about the business is quick and easy to manage because everything is up to you. You get to decide what happens to the business. It also means that all of the profits go to one person – you! 

There are also downsides to a sole proprietorship. If you suffer losses, all of those are yours to bear. You can’t escape business debts because your business liabilities are personal liabilities. The business has no legal entity apart from you yourself, so sole proprietorships are taxed on your personal tax return. If your business goes bankrupt, your personal assets could be sold to pay off those bankruptcy debts.

Partnerships 

Partnerships are also reasonably simple to set up, as very little paperwork is required. A partnership is a business entity owned and operated by two or more people who have contributed money or effort to start and run the business. 

Your profits are split between you and your partners, depending on each person’s capital contribution ratio or on a predetermined ratio based on qualitative contributions. 

As with sole proprietorships, if your business goes bankrupt, all of the partner’s personal assets are at risk of being sold to pay off creditors and debts. You form a partnership by filing paperwork with your state. 

Limited and General Partnerships

Some partnerships split everything down the middle, sharing profits and decisions evenly, which is known as a general partnership. A limited partnership, however, will have duties and liabilities that vary between the partners. 

Perhaps you don’t have a lot of money, but you’re willing to manage your new restaurant day in and day out for a percentage of profits. In that case, your limited partner may provide most of the funding while leaving the work to you and avoiding liability for business losses beyond their original investment.

Corporations 

Corporations are unique business entities that are owned by shareholders. The shareholders elect a board of directors who oversee the operations of the business and are accountable to the shareholders. 

Starting a corporation requires a lot of paperwork and is significantly more expensive to start than sole proprietorships and partnerships. You can take your unincorporated business and start the process to becoming a corporation by filing articles of incorporation with your state. 

Corporations operate as completely separate legal entities from the owners. This means that the owners have limited liability for business losses, which is one of the most attractive things about corporations. Corporations can own property, raise capital through stock shares, acquire other businesses, and sue or be sued. 

Corporations are often very highly regulated business entities; You will need to file annual reports and comply with other regulations to keep your business in good standing with the state.

C-Corps and S-Corps

There are two types of corporations, S-corporations and C-corporations, and the biggest difference between the two relates to taxation. C Corps are taxed separately from their owner; in an S Corp, the business passes profits to the shareholders. They then pay taxes on the business income directly on their personal income tax returns.

With a C Corp, you are effectively subject to double taxation. The corporation pays taxes on income, then it pays wages, and then everyone who receives those wages has to pay taxes on that income a second time. 

S Corps avoid that issue, but generally, only small corporations are eligible for S Corp status. To qualify to file as an S Corp, a corporation must have only one class of stock and no more than 100 shareholders. 

Limited Liability 

Last but not least, we have Limited Liability Companies (LLCs). This entity type operates as a combination of partnerships and corporations, giving you the best of both worlds. 

LLCs provide liability protection to the LLC owners, otherwise known as members of the LLC. This protects their assets, similar to how a corporation would. As with LLCs and partnerships, the profit share and operating agreement are determined by the members. If the parties agree, they can modify these as needed.

Forming an LLC requires paying for the status and filing your articles of organization. Many states may also require submitting your operating agreement, which outlines the bylaws and governance structures of your LLC.

As a member of an LLC, you will also need to pay self-employment taxes. This is the same as if you were operating a sole proprietorship or partnership. 

Making the Right Choice for Your Company

There are a lot of different directions you can go when establishing your business entity. It will affect you personally and professionally, and it will definitely shape your tax liability now and in the future. Take the time to contemplate what exactly you want from your business and your goals. 

Contact our experts if you’re feeling overwhelmed and unsure which entity is best for you. We’ve helped thousands of entrepreneurs like yourself with entity formation, and we’d be happy to discuss your options and help you get the ball rolling with your new business.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.

What Are Your Options When It Comes to Entity Formation?

Sole Proprietorship

A sole proprietorship is one of the simplest business entities an entrepreneur can start. In fact, if you make any money as a self-employed individual, you have technically already started a sole proprietorship — maybe without even realizing it!

This entity type requires few forms for set-up, and only one owner exists. That means all decision-making about the business is quick and easy to manage because everything is up to you. You get to decide what happens to the business. It also means that all of the profits go to one person – you! 

There are also downsides to a sole proprietorship. If you suffer losses, all of those are yours to bear. You can’t escape business debts because your business liabilities are personal liabilities. The business has no legal entity apart from you yourself, so sole proprietorships are taxed on your personal tax return. If your business goes bankrupt, your personal assets could be sold to pay off those bankruptcy debts.

Partnerships 

Partnerships are also reasonably simple to set up, as very little paperwork is required. A partnership is a business entity owned and operated by two or more people who have contributed money or effort to start and run the business. 

Your profits are split between you and your partners, depending on each person’s capital contribution ratio or on a predetermined ratio based on qualitative contributions. 

As with sole proprietorships, if your business goes bankrupt, all of the partner’s personal assets are at risk of being sold to pay off creditors and debts. You form a partnership by filing paperwork with your state. 

Limited and General Partnerships

Some partnerships split everything down the middle, sharing profits and decisions evenly, which is known as a general partnership. A limited partnership, however, will have duties and liabilities that vary between the partners. 

Perhaps you don’t have a lot of money, but you’re willing to manage your new restaurant day in and day out for a percentage of profits. In that case, your limited partner may provide most of the funding while leaving the work to you and avoiding liability for business losses beyond their original investment.

Corporations 

Corporations are unique business entities that are owned by shareholders. The shareholders elect a board of directors who oversee the operations of the business and are accountable to the shareholders. 

Starting a corporation requires a lot of paperwork and is significantly more expensive to start than sole proprietorships and partnerships. You can take your unincorporated business and start the process to becoming a corporation by filing articles of incorporation with your state. 

Corporations operate as completely separate legal entities from the owners. This means that the owners have limited liability for business losses, which is one of the most attractive things about corporations. Corporations can own property, raise capital through stock shares, acquire other businesses, and sue or be sued. 

Corporations are often very highly regulated business entities; You will need to file annual reports and comply with other regulations to keep your business in good standing with the state.

C-Corps and S-Corps

There are two types of corporations, S-corporations and C-corporations, and the biggest difference between the two relates to taxation. C Corps are taxed separately from their owner; in an S Corp, the business passes profits to the shareholders. They then pay taxes on the business income directly on their personal income tax returns.

With a C Corp, you are effectively subject to double taxation. The corporation pays taxes on income, then it pays wages, and then everyone who receives those wages has to pay taxes on that income a second time. 

S Corps avoid that issue, but generally, only small corporations are eligible for S Corp status. To qualify to file as an S Corp, a corporation must have only one class of stock and no more than 100 shareholders. 

Limited Liability 

Last but not least, we have Limited Liability Companies (LLCs). This entity type operates as a combination of partnerships and corporations, giving you the best of both worlds. 

LLCs provide liability protection to the LLC owners, otherwise known as members of the LLC. This protects their assets, similar to how a corporation would. As with LLCs and partnerships, the profit share and operating agreement are determined by the members. If the parties agree, they can modify these as needed.

Forming an LLC requires paying for the status and filing your articles of organization. Many states may also require submitting your operating agreement, which outlines the bylaws and governance structures of your LLC.

As a member of an LLC, you will also need to pay self-employment taxes. This is the same as if you were operating a sole proprietorship or partnership. 

Making the Right Choice for Your Company

There are a lot of different directions you can go when establishing your business entity. It will affect you personally and professionally, and it will definitely shape your tax liability now and in the future. Take the time to contemplate what exactly you want from your business and your goals. 

Contact our experts if you’re feeling overwhelmed and unsure which entity is best for you. We’ve helped thousands of entrepreneurs like yourself with entity formation, and we’d be happy to discuss your options and help you get the ball rolling with your new business.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Charlotte Accounting and tax Solutions assumes no liability for actions taken in reliance upon the information contained herein.