Forming a Limited Liability Company can offer many benefits to a home business owner. The main reason business owners form a Limited Liability Company (LLC) is to protect their assets, but there are other moving parts.
What is a Limited Liability Company (LLC) Exactly?
A Limited Liability Company (LLC) is a non-corporate business structure that affords its members various tax and legal benefits – limited liability, single tax, and the ability to actively participate in the company’s management. Members and managers are not personally liable for company debts – PROVIDED the LLC is operated properly.
For IRS purposes, the LLC is not recognized as an entity and can be treated as:
- Sole Proprietorship – Single Member LLC
- Partnership – Multi-member LLC
- Association – taxable as a corporation
We’ll focus on Single and Multi-member LLCs, as that is most common in the home business arena.
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The Limited Liability Company offers 4 main benefits: Flexibility, Pass-through Taxation, Ownership flexibility, and ease of management.
The Limited Liability Company has the benefit of offering a flexible structure. On its own, there is no requirement for the LLC to choose a business structure, meaning that it’s already decided.
Single member LLCs are treated as Sole Proprietors. The LLC is considered separate for Employment Tax purposes, but is subject to Self-Employment Taxes.
Multi-member LLCs are treated as partnerships. However, the owners of the LLC can also elect to be treated as an S or C Corporation.
Where S Corporations are limited to 100 partners, there are no limits to the number of partners a Multi-member LLCs can have. All members of a LLC can participate fully in the management of the company without losing the protection of limited liability. Another advantage under ownership is that you can have foreign members. With an S Corporation, all members must be a US citizen. A foreign spouse will make one ineligible to be a partner in a S Corporation. This does not apply to Limited Liability Companies.
Different from a C Corporation, Limited Liability Companies are not taxed as a business. Profits and losses are passed through to the owners or partners and taxed at the individual’s tax rate. The biggest advantage here is the benefit of single taxation.
Single member LLCs will still file a Schedule C. Multi-Member LLCs (Partnerships) must file a Form 1065 partnership return; however, the income is still passed through to each shareholder to be reported on their personal tax returns. The partnership itself is not taxed. The partners are also subject to self-employment tax.
Ease of management
Limited Liability Companies offer the benefit of having simpler management requirements and a lot less paperwork! While every state does not require it, every LLC should have an Operating Agreement that establishes how the business will be managed and operated. It will establish the rights of each member, how managers will be elected, as well as other critical operational procedures for your particular business. Any changes to the operation can be made simply by amending the Operating Agreement, which is not publicly filed.
The Limited Liability Company is a fairly new entity. While it’s very easy to form a LLC, there are several things you need to have in place. No worries though! I got you! I created a Limited Liability Starter Kit to help you out!
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