Here at CorpNet, one of our biggest services is helping business owners form an LLC and manage the business filings to register their business with the state authorities. Deciding to form an LLC can be one of the best business decisions you’ve ever made, especially if you want flexibility with regards to taxation, ease of including partners or operating as a sole proprietor, and most importantly, the “limitation of liability” to protect your personal assets from the debts or liabilities of your business.
Since we work so often with entrepreneurs who want to file an LLC, we’d like to dedicate today’s blog post to tell you all about this unique, flexible, adaptable corporate structure.
What is an LLC?
LLC is short for “Limited Liability Company,” (NOT a Limited Liability Corporation) which is an interesting definition – unlike a C-Corporation or S-Corporation, an LLC is not technically a “corporation” in the same sense. The LLC acts like a hybrid business entity, giving the owner some of the same characteristics as a corporation, but with the pass-through taxation and flexible operations of a sole proprietorship.
What are some of the main advantages of incorporating a business as an LLC?
There are several advantages to doing business as an LLC:
- Simpler paperwork: If you decide to start a business and incorporate as an S-Corporation or C-Corporation, you’ll need to appoint a board of directors, save your meeting minutes, and deal with various other annual reports and regulatory business filings. The LLC does not require nearly the same level of complexity in handling the paperwork. The LLC gives you an easy way to protect your personal assets without as many regulatory “hoops” to jump through, compared to a Corporation.
- Great for companies with single owners. If you’re a sole proprietor, chances are you wanted to go into business “for yourself,” with all the freedom and flexibility that go with that. If you’re a solo entrepreneur, chances are you don’t want to get bogged down with the more complex business filing and regulatory requirements that go along with running your business as an S-Corporation or C-Corporation. For these reasons, deciding to form an LLC gives you the utmost flexibility. Compared to being a sole proprietor, your day-to-day experience of running a business is not much different after forming an LLC – but unlike your days as a sole proprietor, the LLC gives you a corporate shield to protect your personal assets from the worst-case scenarios (lawsuits, business failure, etc.) that might befall your business.
- Pass-through taxation: For LLCs, the usual method of paying taxes is “pass-through taxation,” meaning that the LLC does not owe taxes and is not a tax-paying entity. In the case of a sole business owner of an LLC, the individual owner has to report the LLC’s earnings as personal income for tax purposes. (Again, this is another example of how operating as an LLC does not really make your life all that different from being a sole proprietor – it’s easy to go from sole proprietorship to LLC status.)
- Optional corporate taxation: LLCs have the option to be taxed as a corporation, by filing IRS Form 8832. This gives the LLC owner the option of paying taxes as a C-Corporation (the corporation pays income tax, and the company owners also owe taxes on dividends) or as an S-Corporation (the corporation does not pay taxes, and the company’s owners owe tax on their income, but their income is counted as employee income, resulting in a tax savings on self-employment tax).
NOTE: CorpNet cannot give tax advice and this article does not claim to offer tax advice – so be sure to talk with a professional tax adviser before you make any final decisions about how to handle your corporate and personal income tax liabilities.