Like any functioning company, an LLC maintains its own records and conducts business. The key difference involves the owners of an LLC, or "members," who are not liable for the debts and liabilities of the company. In other words, should an LLC file for bankruptcy, creditors cannot force the members of an LLC to cover the company's debts with their own money. When it comes to paying taxes, an LLC is normally taxed as a "pass-through" entity, like a sole proprietorship or partnership, so that the owner is not taxed twice. This is compared to a regular "C" Corporation, which pays tax on its net income and dividends.
LLCs nationwide usually adhere to the same principles:
- Business Name—This name must differ from any other LLC in that state. It must also mention that the entity is an LLC and not include words that state has restricted. The business's name is registered once the business itself is.
- File an Articles of Organization—This document contains basic information about your LLC (name, address, members, etc.) and depending on the state is filed with the Secretary of State, State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or Division of Corporations & Commercial Code.
- Operating Agreement—Whether your state requires an LLC to make such agreements, it is advisable for them to do so if they have more than one member. Operating Agreements can streamline the finances and organization of an LLC and typically include percentage of interests, allocation of profits and losses, member's right and responsibilities and other provisions.
- Licenses and Permits—All relevant licenses and businesses must be obtained after registering an LLC. These vary by industry, state, and locality.
- Employees—An LLC must adhere to federal and state regulations regarding the hiring of employees.
- Announcement—Some states require newly-formed LLCs to publish a statement in a local newspaper about your business.
Filing for Taxes
As stated, LLCs do not pay an income tax but rather the members do. It is important to note however that some states do tax an LLC's income. Regardless, LLCs are required to file taxes as a corporation, partnership, or sole proprietorship but can choose a classification if not automatically classified as a corporation. Put simply: a single-member LLC files From 1040 Schedule C; partners in an LLC file Form 1065; and LLCs operating as corporations file Form 1120.
LLCs have the option of requesting S-Corp status but must file Form 2553 with the IRS within the first two months and fifteen days from the start of the tax year. Contact the state's income tax agency for more information on S-Corp status.
LLCs has certain advantages and disadvantages. Its advantages include:
- Limited Liability: Members are protected from some but not all of the LLC's decisions and action.
- Easier Operating: LLCs have less paperwork and smaller startup costs than S-corporations.
- Profit Sharing: Members themselves choose how to allocate profits and losses.
However, its disadvantages may include:
- Shorter Lifespan: Unless there are provisions made in the operating agreement to prolong its life, an LLC is dissolved in most states once a member leaves.
- Self-Employment Taxes: The government considers members of an LLC self-employed and must contribute towards Medicare and Social Security. The net income of an LLC is subject to this self-employment tax.
M. Ross & Associates, LLC provides legal counsel and representation for businesses and business owners involved in the formation or maintenance of an Limited Liability Corporation. To learn more about LLC's or to speak to our attorney about your situation, contact our firm today.