Not so long ago, the limited liability company (LLC) was a new kind of legal structure available for small businesses. At that time, LLCs were like the new kid on the block amongst all the other business entities. Since then, it hasn’t just made a place in the market, but has become one of the most popular business entities used by business owners due to its flexibility and liability protection.
Let’s say that you started a small business and ran into some legal issues or got into a huge debt. The liability protection of an LLC would make sure that your personal belongings like your car and house are safe. All the debt will be paid using the business assets only. Without the liability protection, you might end up losing everything you have including the company and the shirt off your back.
Now, you might be thinking that all this just sounds the same as a corporation. And, you are right, to a point. But there are some other things that the LLC offers that a corporation does not, particularly its flexibility. In this post, we will deep-dive into what an LLC is, and how it is a great business entity choice for your business.
Just like a corporation, a limited liability company is a legal entity separate from its owners. An LLC can easily get its own tax identification number, do business, and even open its own checking account. It is a simple and highly versatile company structure as compared to S-corps and C-corps. In short, it is a legal entity similar to the combination of the following:
The owners of an LLC are called members and every member of the LLC has liability protection. Generally speaking, there can be an unlimited number of members and anyone can be a member of an LLC, including:
An LLC can be opened in any state. The profits and losses of the company can easily be divided differently among the various entity designations. This means that the LLC members can distribute the earnings using any method they want, unlike s-corporations. In addition to this, limited liability companies do not have to worry about much of the standard documentation that the other corporations have to complete to stay compliant, including shareholder meeting minutes, annual director meetings, and other formalities.
One of the main benefits of starting an LLC is that you get a lot of tax flexibility and benefits. By default, the LLC is taxed as a pass-through entity. This means that it can avoid the double taxation issue that C-corps have, so that the income tax is only paid at the personal level by the members on their personal income tax returns for the earnings made in the company.
Another tax benefit is that the LLC members can easily claim their own share of loss in the business on their income taxes. This is something great for those who have just started up as it helps in saving a lot of tax. But to be able to gain these benefits, you will have to choose to be taxed as an S-corp, which is one of the four tax classifications available for an LLC.
The four tax classifications available to LLCs include: C-corporation, S-corporation, partnership, or disregarded entity (sole proprietorship). Before we can talk about each, you need to know that electing to be taxed as an S-corporation might not be the best choice for your company. You will need to choose the best method that suits your business and its needs. The best way to get around this is by taking the help of a tax lawyer and a business attorney while electing on how you want your LLC to be taxed.
With this said, let us now look into the differences in each tax classification with the help of the table below:
From the table, if you elect to be taxed as a:
By default, the federal government taxes a single-owner LLC as a disregarded entity and a multi-owner LLC as a partnership. To get the benefits of being taxed as a C-corporation or an S-corporation, you will have to file for the election using the Form 8832 with the Internal Revenue Service.
Note: Before you make a tax election, you should consult an experienced tax lawyer and your CPA. They will help you make the right choice based on your business plans and future.
There are a lot of advantages of an LLC, these include:
The above advantages are the same regardless of the tax classification made for your LLC. But it should be kept in mind that the tax classification election you make will dictate if your company is allowed to enjoy some additional benefits or not, other than those mentioned above. Each of these benefits have been explained in the below table:
#1 Equity Flexibility
#2 Pass-Through Profits & Losses
Just like everything, LLCs come with some trade-offs. These include:
Many small business owners choose to open an LLC due to its flexibility, versatile taxation methods, and the many benefits that it comes with. So, the LLC structure is can be perfect for all kinds of businesses including professional practitioners, real estate companies, retail companies, e-commerce businesses, technology companies, etc.
But at the end of the day, choosing the LLC as your business entity would depend on how you see your business growing and progressing in the future and what you want it to do. The best way around the decision is by taking the help of an experienced business attorney and tax lawyer.
Freeman Lovell LLC offers these services and can help you make your choice. All you need to do is contact us and let us know about your business plan. Based on this, we will guide you in making the right choice. Feel free to reach out to me at josh@freemanlovell.com or text us at (385) 217-5611 to learn more!
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