When considering starting an LLC, many new owners opt for a limited liability corporation (LLC). An LLC is a legal entity separate from its owners that limits personal liability and provides advantages over sole proprietorships and partnerships. Limited liability companies are generally set up as organizations and are able to function for tax reasons. In most cases, an LLC does not have to disclose its members' personal information or receive reports about its finances.
As with most decisions, there are pros and cons associated with both an LLC and LLCs. Limited Liability Company provides several key advantages over other business formations. One of these benefits is the ability to pass through state and local taxation. Because LLCs are considered pass-through entities, they are not required to pay corporate taxes on their income. As a result, new business owners can save a significant amount of money on the cost of incorporation. Additionally, when you become involved in a lawsuit or other matter, your LLC will not be subjected to double taxation.
Benefits Of LLC
On the downside, an LLC has limited liability. Although it is relatively less taxed than a corporation, it is still subject to tax. The tax burden may be greater under an LLC than a corporation because a corporation is considered a "pass-through entity" and its owners are subject to double taxation. This double taxation results in higher income taxes for the members of an LLC compared to those in a corporation. Limited liability also means that personal assets of the owners are protected from double taxation.
Because an LLC is not subjected to state and local taxation, new business owners have the opportunity to save a significant amount on the cost of incorporation. Because most small businesses are considered pass-through entities, they are not required to register as corporations. Consequently, LLCs do not appear on public documents such as state filings and reports. As a result, LLCs are not able to suffer the penalties and assessments that corporations are subjected to.
Additionally, starting an LLC does not require any kind of start-up cost, although there are some legal formalities to be taken care of immediately upon formation. Some states do not allow new LLCs to be filed or registered without paying a small filing fee. In addition, many states require the filing of an article of organization form with the secretary of state. An article of organization form is required because it enables the state to maintain records regarding the formation of the business entity.
What You Need To Know
There are two basic types of LLCs - a simple and a partnership. A partnership is a formal relationship between two or more business owners that grants them the right to use the funds of the partnership for the operation and maintenance of the partnership. An LLC is a separate entity from its partners. Under the terms of the law, business owners may divide their profits among themselves through pass-through taxation.
Pass-through taxation means that a portion of the profit is deducted through income tax and given to the partner in the business structure. An LLC can have multiple members. Therefore, in order to benefit from pass-through taxation, multiple members must share in the profit. The profits of LLCs are subject to double taxation; therefore, the longer the duration in which an LLC has been established, the greater the chances of double taxation.
The last requirement is the publication requirement. Starting an LLC does not require you to register it with the Small Business Administration or the Department of Revenue. You have to file a statement of authority with your county clerk that indicates why you are starting an LLC. If all these requirements are fulfilled, you're good to go!
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