Why forming an llc

Among all forms of companies, 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 there is no requirement of having a board of directors, annual meetings, or maintaining strict record books.

These features reduce unnecessary hassles and help save a lot of time and effort. The filing is done with the Secretary of State for most states and has an associated filing fee. Next comes creating an Operating Agreement, which though is not mandatory in most states but is recommended especially for multi-member LLCs.

On registration of the business, other licenses and permits have to be obtained. Additionally, some states like Arizona and New York require publishing about the LLC formation in the local newspaper. LLC provides a lot of flexibility when it comes to investing as well as profit sharing. In an LLC, members can opt to invest in a different proportion than their ownership percentage i.

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. 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.

While a limited liability company LLC offers an edge over some of the other forms of business entity, there are also some drawbacks which need to be looked at before selecting an LLC as the business structure.

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 further 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. The members of an LLC have to pay the self-employed tax contributions towards Medicare and Social Security as they are considered as 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 before making this choice.

The fee which is typically paid by an LLC as initial costs or ongoing charges is more than that for business entities like sole proprietorship or general partnership 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. LLCs are a relatively newer business structure and thus there have not been many law cases related to them.

For this reason, there is not much legal precedent or case law for LLCs as there is for the older forms. Having a certain legal precedence helps to act accordingly in the same given case scenario.

There is more vulnerability as there are few established laws. LLCs are a good combination of protection with flexibility and 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 hassle and complexity in their functioning. However, consulting an accountant or lawyer for expert opinion is advisable before taking the final call. Jennifer Reuting. Wiley Publishing, Small Business Administration. LLCs and S corporations are different aspects of business operations, but are not mutually exclusive. Use this guide to learn more about the difference between an LLC vs.

Personal Taxes. Self-employment taxes can take a big bite out of your income—but you can take steps to minimize the impact. Forming a Sole Proprietorship. Sole proprietorships are inexpensive to form and give you more freedom and control, but they come with some significant drawbacks.

Use this checklist to learn about which business licenses and permits you may need. Setting up an LLC is a great way for business owners to limit their liability for company debts. Starting Your LLC. You don't need an LLC to start a business, but, for many businesses the benefits of an LLC far outweigh the cost and hassle of setting one up. Picturing your business' future and making detailed plans to reach your goals will help you choose the right business entity for your new company.

What Is an LLC? Other possibilities include: Sole Proprietorship. This is where a single person is the owner of the business. The owner does not have any protection from personal liability for business debts. General Partnership.

This is the simplest arrangement where two or more people own a business. The partners do not have any protection from personal liability for business debts, or for actions of the other partners taken within the scope of the business. Limited Partnership. A limited partnership has two types of owners: general partners who operate the business, make the decisions, and have personal liability , and limited partners who are basically investors who do not have the right to operate the business or make business decisions, and do not have personal liability for business debts.

In many ways similar to an LLC, a corporation is owned by the investors called shareholders or stockholders , who provide the funds, assets, or services used to operate the business. The shareholders elect a board of directors , who are primarily responsible for major business decisions.

The board of directors also selects officers , who are responsible for the day-to-day operation of the business. In a small corporation, the shareholders may also be the directors and officers. Reasons you might want an LLC include: Limiting your personal liability for business debts. With an LLC, only the assets owned in the name of the LLC are subject to the claims of business creditors, including lawsuits against the business.

LLCs can be used to own and run almost any type of business. However, in some states some types of professionals must form special professional LLCs. An LLC can be used for a business of any size—from one-owner operations to businesses with many co-owners. LLCs are also the most common legal entity used to own rental and commercial property. Personal asset protection.

An LLC provides its owner or owners with limited liability. This means that means you—the LLC owner—are generally not personally liable for any debts incurred by your LLC business or most business-related lawsuits. Because you're not personally liable, creditors or people who file lawsuits against your LLC can't collect against your personal assets like your personal bank accounts, personal car, or home.

Pass-Through Taxation. LLCs ordinarily provide their owners with pass-through taxation. The profits or losses the business incurs pass through the business to the owner's personal tax return. Such profits are taxed at the owner's personal tax rates. An LLC with two or more members is usually treated like a partnership for tax purposes. Again, profits or losses are reported on the owners' personal returns and taxed at their personal rates.

Because LLCs are usually pass-through entities, their owners can qualify for the special pass-through tax deduction created by the Tax Cuts and Jobs Act. This deduction took effect in and is scheduled to continue through An LLC is the simplest business entity to form and operate. Unlike with a corporation, it is not necessary to have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.

LLCs provide enormous flexibility when it comes to ownership, management, and taxation. There are no minimum or maximum limits on the number of owners--also called members--that an LLC can have. LLCs can be managed by their members--that is, all the owners share responsibility for the day-to-day running of the business. LLCs also have the option of designating one or more managers to run the business. The managers can be designated members, nonmembers, or a combination of both.

LLCs can also choose how they want to be taxed. They are usually taxed as sole proprietorships or partnerships, but SMLLCs and multi-member LLCs have the option of choosing to be taxed like a corporation. This is easily accomplished by filing a document called an election with the IRS.

LLCs can choose to be taxed as a C corporation or an S corporation. Either way, the LLC owners ordinarily work as employees of the corporations. With C corporation taxation, the corporation pays taxes on the business profits at the corporate tax rate. With S corporation treatment, the LLC remains a pass-through entity, with profits passed through the business to the owners to be taxed at their individual tax rates.

But such distributions are not subject to Social Security and Medicare taxes. Thus, S corporation tax treatment can result in tax savings. Forming an LLC to own and run your business helps give you credibility. It reassures customers that yours is a real business. You'll also have an official business name to use.

To learn more, see " Advantages of an LLC ". Cost : It generally costs more to form and operate an LLC than to be a sole proprietor or have a partnership.