So you've got a great business concept and you're motivated to make it happen. You've also done your homework and come to the conclusion that the best way to safeguard both your personal and corporate interests is to establish a legal corporation.
You decide to create a limited liability corporation (LLC) as a result, but how do you do it and what are the things you need to think about? This essay goes through the main benefits and drawbacks of forming an LLC in the US as well as how to get ready for a successful formation.
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Source: https://bbcincorp.com/offshore/articles/us-limited-liability-company-advantages-and-disadvantages
What are the benefits of LLCs?
The following benefits come with choosing an LLC as your company structure:
flexible tax policies
In terms of taxation, LLCs benefit from greater freedom. According to the needs of the firm, LLCs may choose to be taxed as S-Corporations or C-Corporations in addition to the IRS's two default tax statuses.
It's crucial to speak with a tax adviser to determine which tax status is best for your company because each one has advantages and disadvantages of its own.
is subject to single proprietorship tax
A single-member LLC is regarded as a sole proprietorship for taxation reasons, which means that the member's personal tax return must include the business income. In this manner, the member can decrease paperwork by avoiding the need to submit a separate company tax return.
Partnership-based taxes
Unless it files to be regarded as a corporation, the IRS recognizes a multi-member LLC as a partnership for tax purposes, which exempts it from paying taxes on business revenue. Instead, through a process called pass-through taxation, the earnings and losses are distributed to the members and reported on their individual tax returns.
Due to the fact that the profits travel straight to the owner and are taxed at the personal income tax rate, being taxed as a partnership helps LLCs avoid double taxation.
When corporate and individual taxes are applied twice on business profits, this is known as double taxation.
For instance, a corporation's profit is taxed both when it is produced and when it is delivered to the shareholders as dividends, resulting in a double tax.
A corporation does not benefit from a tax deduction when it distributes dividends to its shareholders. Losses of the corporation are not deductible by shareholders.
charged C corporation tax
The classification of your LLC as a C-corporation may be chosen by the members. The LLC would in this scenario file a corporate tax return and pay taxes on business income, but it may avoid paying self-employment tax.
The problem with this arrangement is that corporate profits are taxed twice: once when they are produced at the corporate level and once more when they are given to the members as dividends.
S corporation tax treatment
IRS Form 2553 must be submitted in order for an LLC to choose to be taxed as a S company. A tax deduction for social security and Medicare taxes would be available as well as an exemption from corporate income tax for the LLC.
The corporation will instead be subject to pass-through taxation, much like a partnership.
How Does Taxation of an LLC as a S Corp Work?
In order to have her bitcoin business taxed as a S corporation, Beth sets up an LLC.
The business brings around $200,000 annually. Beth receives a salary of $100,000 as an employee, and the additional $100,000 in profits are passed through and recorded on her individual income tax return as a S corporation payout rather than as a salary.
Bath and her business do not have to pay Social Security or Medicare tax on this sum because it is not considered to be employee wages. Self-employment taxes totaling $15,300 (or 15.3% of $100,000) are the only payment required.
If Beth had not decided to give her LLC S company status, she would have been required to pay self-employment tax on her full $200,000 profit. This results in additional Medicare and Social Security taxes of $2,900 and $1,252, respectively (total sum for both employer and employee).
Defend against liability
A limited liability company (LLC) shields members from personal liability by lowering their financial risk exposure and banning the use of assets to settle corporate debts. Members' assets, including their homes, automobiles, properties, and investments, are often protected from seizure if the LLC is sued or owes money.
Each member of an LLC must create an Operating Agreement outlining the level of liability protection they seek. Others could be willing to take on some personal risk in exchange for a higher profit share, while some members might prefer total liability protection.
A personal guarantee that specifies the conditions under which each member will be responsible for the LLC's debts may be required by the Limited Liability Company Agreement.
You can lose this important defense and be held accountable if your LLC steals money or engages in unlawful activity. For instance, if you sign a contract as the owner of an LLC without being authorized to do so, you might be held accountable if the LLC is unable to uphold its end of the bargain.
Therefore, even while an LLC provides some personal liability protection, it's crucial to know the limits of this protection and take precautions to lower your risk.
If you value your privacy, having an LLC can help business owners maintain a clear separation between their personal and professional matters.
You can create an LLC without revealing your identity since certain states do not require LLC formation documents to list members. From a business perspective, though, this isn't necessarily the ideal course of action because it can make obtaining a bank account and securing business credit more challenging.
The regulations that apply to LLCs vary from state to state, so it's crucial to find out what level of disclosure is necessary by contacting the Secretary of State's office in your state.
Consider Wyoming or Delaware, which have outstanding company privacy regulations, if identity protection is your top issue.
Other benefits of LLCs
necessary formalities
Members of an LLC are expressly excluded from the following duties, and LLCs have fewer filing requirements than corporations have.
Annual general meetings are held and strictly recorded.
keep a record of the names of the officials, directors, and staff
Additionally, you can alter the provisions governing your LLC formalities as necessary via an Operating Agreement.
flexibility in management
There are two management philosophies available to you:
All members can take part in management and decision-making processes under a member-managed organization.
Manager-managed approach: Members designate one or more managers to take care of daily operations and make business decisions on their behalf.
Depending on the members' abilities, interests, and time commitments, you may then decide how to operate your business the best.
ease of setup and upkeep
With minimal initial paperwork and affordable setup costs, the LLC is easy to establish up. Simply submit the Articles of Organization to the Secretary of State's office in your state and pay the necessary filing fee to begin the incorporation process.
After creating your LLC, you must continue to maintain your business entity status by submitting an annual report and paying an annual fee. Although they vary from state to state, these regulations are typically much less onerous than those of a corporation.
What drawbacks do LLCs have?
Think about the following potential drawbacks before electing to form your company as an LLC:
only a few investment options
Your capacity to raise money may be constrained if your business is an LLC because it cannot sell shares to outside investors. It will be necessary to convert your LLC into a corporation, which can be a time-consuming and expensive process, if you want to draw in outside investors.
Additionally, because investors cannot join an LLC without the approval of all other members, it is challenging to transfer LLC ownership.
Unless there are special circumstances, such as a member's death, divorce, retirement, or other similar events, certain states may still reject the transfer even if all members consent to it.
A higher tax burden
The LLC could incur extra fees, such as: depending on the state you choose.
a franchise fee
Some states charge LLCs this as a condition of doing business there (e.g., California, New York, Delaware, etc.).
Franchise tax can be either a flat fee or a percentage of the LLC's revenue, depending on the laws of the state.
Tax on employees
In some jurisdictions, LLCs with employees must pay federal employment taxes, namely Social Security (6.2% for the employer and 6.2% for the employee, or 12.4% total); Medicare (1.45% for the employer and 1.45% for the employee, or 2.9% total); and Unemployment tax at a rate of 6%.
Constant expenses
To maintain good legal standing, an LLC must pay an annual fee. Although the state-specific LLC renewal price varies, it is typically greater when compared to other business kinds.
Due to the additional documentation that must be filed for each series if you opt to structure as a series LLC, your maintenance costs may even be greater. Additionally, in order to conduct business in other states, you could have to pay international qualifying costs.
fewer structures
Because there are fewer rigid regulations, LLC members have greater discretion to manage their businesses, but this also implies that there is less structure and more risk. It could be difficult to hold members accountable for their conduct if they are not obligated to hold regular meetings or record minutes, for example.
Members could also fail to reach consensus on important corporate issues, which could cause the corporation to become paralyzed or even collapse.
Risk can be reduced with the use of a well-written operating agreement. It will shield your LLC from any member disputes and make sure that everyone is on the same page regarding the company's activities, even though employing an attorney to draft it for you would result in additional fees.
An LLC's advantages and disadvantages are simple to understand, but how can you be sure that it's the right legal form for you?
By responding to a few straightforward questions, you can use our US Business Entity Selection Tool to identify the best business kind.
final observations
There are benefits and drawbacks to creating an LLC, as you are now aware. Your confidence in selecting the right choice for your business will increase if you take into account both sides of the issue.
If you're still unclear about whether an LLC is the best business structure for you, talk to our helpful adviser for assistance in the real world. Please feel free to contact us at [service@bbcincorp.com](mailto:service@bbcincorp.com), and we will respond as quickly as possible.
