A small business LLC, utilizes the benefits of a partnership such as avoiding double taxation while also taking advantage of a liability shield. 3 min read updated on February 01, 2023
Provided a member does not behave illegally, unethically, or negligently regarding the operation of the business, he or she is shielded from being personally liable for the debts of the LLC.
A few facts concerning L
A small business LLC, or limited liability company, is a business type that utilizes the benefits of a partnership such as avoiding double taxation while also taking advantage of a liability shield similar to a corporation.
Definition of a Limited Liability Company
An LLC may be run by any number of owners, officially known as members.
An unlimited number of members is allowed and they can be made up of other companies or individuals.
LCs are as follows:
- Forty years ago, Wyoming became the first state to allow an LLC as a business entity.
- As reported by the IRS, there are roughly 2.4 million LLCs in the US today.
- LLCs are spreading faster than any other business structure.
LLCs best suit businesses with the following needs:
- Liability protection
- Flexibility concerning the operation and taxation of the business
- No need for investor-provided money
Although the formation of an LLC is less complex than a corporation, the filing fees for the state are typically similar.
Members should complete the following when forming their LLC:
- File the Articles of Organization with the applicable state
- Place an announcement in the local paper regarding the formation of the LLC
Additionally, owners are strongly recommended to create an operating agreement for their LLC because it establishes financial structure and operating guidelines.
An operating agreement includes the following information:
- Interest percentages
- Earnings and losses details
- Rights of the members
Members must retrieve local permits and sign up for a trade name if the business will be operating under a name other than its formal LLC name. If a decision is not made with the IRS, the LLC's income will be dispersed to the owners just like it is with a partnership or sole proprietorship. It is also possible for an LLC to choose to be taxed as a C or S corporation.
Some LLCs prefer to be taxed as an S corporation because the income of the business will then be included in their individual tax returns.
In order to give to Medicare and social security, LLC members are typically required to pay a 15.3 percent self-employment tax on the income of the business.
Under an S corporation election, members can acquire a decent salary from the income of the business and then allocate the leftover income to unearned distributions.
The self-employment tax is not applied to unearned distributions; therefore, the amount owed in taxes will be decreased.
Advantages of an LLC
As long as members run their business sensibly and keep their individual finances separate from the business, they will not be held responsible for the business's actions. In other words, the members' personal assets are protected from creditors that are going after the business.
An LLC can choose to act as a pass through entity which means that the earnings of the business will not be taxed on the company level but rather on the members' individual tax returns. This benefit simplifies the process of filing taxes and also minimizes tax hardships in the event of financial losses.
An LLC can be operated by its members, allowing them to play a part in the everyday operations, or by external managers who may be more knowledgeable when it comes to operating a business. Most states automatically assume that an LLC is member-managed unless the members' file with the proper state agency telling them differently.
Another advantage of LLCs is that the amount of paperwork and fees are quite mild comparatively; however, the actual amounts vary from state to state. For instance, Arizona charges a fee of $50 to file the Articles of Organization while Illinois charges $500.
Ultimately, the formation is easy enough that legal help is not necessary; however, it is strongly recommended that the assistance of a lawyer or accountant be considered.
The following are a few more advantages of LLCs:
- They provide multiple choices for taxation elections
- Members do not need to be US citizens
- They have a strong, positive reputation
If you need help forming a small business LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
