Are you a small business owner who has been asked if their company is an LLC and you don’t know what that means? Or maybe you are an australiabusinessblog.com in the early stages of opening a new business and your head is swimming with all the options ranging from a sole proprietorship to an LLC to a corporation.
Keep reading for everything you need to know about an LLC and whether it’s the right option.
What is an LLC?
A Limited Liability Company (LLC) is a business structure that provides owners with protections usually only available to corporations, but retains the simplicity of a sole proprietorship.
This entity also offers pass-through taxation as it is managed by a separate entity that is not limited to a specific number of shareholders and is not highly regulated.
Related: How to Start a Limited Liability Company (LLC) | australiabusinessblog.com
What Are the Benefits of an LLC?
There are benefits to every business structure. From a BV, VOFs and sole proprietorships each offer unique advantages.
The advantage of forming an LLC is that it takes the benefits of each business structure and combines them into one.
How Can an LLC Provide Asset Protection?
One of the main benefits of an LLC is that it protects your personal assets.
For business debts or lawsuits that your business may encounter, the owner is not personally liable. This ensures that their personal assets cannot be used as payment as they are completely separate from the company.
Related: LLC Basics – australiabusinessblog.com.com
What Tax Options Does an LLC Have?
An LLC offers more tax options than other business models.
For tax purposes, they are either taxed as a sole proprietorship or as a partnership, depending on the board structure and the number of members involved in the business.
Members declare their share of business income and expenses on their personal income tax returns and then pay income tax on the profits.
Members who also work in the business are then considered self-employed and must declare it on their federal income tax return and then pay self-employment tax on their share of the profits.
If the company does not want to be taxed as a sole proprietorship or partnership, it can also choose to be taxed as an S corporation (S-corp) or a C corporation (C-corp).
a C Corp pays corporate tax and the owners pay tax on their distributions. An S-corp is what’s known as a pass-through entity, meaning it pays no corporate income tax, but each owner does pay income tax on their share of the profits.
It is important to note that not all LLCs are eligible for S-corp taxation as they must meet certain conditions IRS (Internal Revenue Service) requirements..
A single member LLC can also be referred to as a omitted entity. What this means is that it will be ignored or disregarded for federal income tax purposes.
Related: The 5 Biggest Tax Differences Between an LLC and Corporation | australiabusinessblog.com
Does an LLC offer flexibility?
Since LLCs are not required by law to hold annual shareholders’ meetings or even require a board of directors, they offer more flexibility than other business models.
On the contrary, members of an LLC are free to organize the business as they see fit and be managed by members as administrative requirements like most businesses do not bind them.
Related: Choose your business structure | australiabusinessblog.com
Does an LLC designation make your business more credible?
When you structure your business as an LLC, you receive the exclusive rights to use your business name as a business entity.
Since most states don’t allow a business to use an existing business name, you can create a public registry of your name, making it unavailable.
The LLC designation at the end of the company name can also lend credibility to a company.
Related: How to Structure a Single Member LLC | australiabusinessblog.com
How Are Profits Divided in an LLC?
A major advantage of an LLC is that members can decide how the profits are distributed.
Typically, companies pay dividends and partnerships usually distribute profits among the partners, but owners of an LLC can choose how the profits are distributed.
Remember that the IRS has rules about the special allocation of profits and you may need to show proof of profit sharing or a legitimate economic need to prove it’s not just an attempt to avoid paying taxes.
Are there any downsides to an LLC?
While an LLC has specific advantages, it also has some notable disadvantages.
The winnings are subject to high LLC tax
The profit of an LLC is subject to Social Security and Medicare taxes. In some cases, owners of an LLC can pay even more taxes than a corporation.
Also, both the salaries and profits of an LLC are subject to self-employment taxes, which are currently around 15.3%. While in a company only the salaries are taxed, not the profit.
This drawback hits owners who take a salary of less than $97,500 the hardest.
Related: Pros and Cons of the LLC Model | australiabusinessblog.com
An LLC must recognize its profits immediately
Unlike a corporation, owners of an LLC must recognize their profits immediately.
A C-corp does not have to immediately distribute its profits to shareholders. This means that a C-corp is not always taxed on the company’s profits.
Since an LLC is not subject to double taxation, the company’s profits are then automatically included in the member’s actual income.
Related: Basics of Business Structure | Setup | australiabusinessblog.com
Fewer fringe benefits are available
Employees who receive fringe benefits such as group insurance, medical benefits, health insurance and parking must treat these benefits as taxable income with a BV. This also applies to employees who own more than 2% of an S corp.
On the other hand, C-corp employees who receive fringe benefits are not required to declare them as taxable income on their income tax returns.
How to set up an LLC
There are seven steps you need to take to start an LLC.
There are different legal requirements from state to state, so it is recommended that you talk to a legal professional about the specific requirements where you live.
Choose a company name
The first step in starting an LLC is choosing your business name.
Not only do you have to choose a name that doesn’t already exist, but your state may also have certain requirements that it must meet.
Related: Naming a business: 7 useful tips | australiabusinessblog.com
Choose a registered agent
The next step is to choose a registered agent. A registered agent receives official and legal documentation on behalf of the company. Once the registered agent receives these documents, he passes them on to the company.
The registered agent must be at least 18 years old. You can choose yourself or an employee. The main requirement is that the agent must have an in-state address during normal business hours.
Related: 4 Best LLC Services of 2023 | Entrepreneurs guide
Obtain a copy of your state’s LLC articles of association form
In most states, you must file a document called the Articles of Association with the state agency that handles business filings to form your LLC.
Each state has a specific form you will use; some also call it a certificate of formation.
Complete the LLC Organization Form
Each state has specific requirements for individuals trying to create an LLC. Some of the typical details you may be required to provide include:
- The company name.
- The main address of the company.
- The purpose of the company.
- How the LLC will be managed.
- The contact details of the registered agent.
- The duration of the LLC.
Once you have completed this form, at least one of the business owners must sign it.
Related: Ten Steps to Organizing an LLC | australiabusinessblog.com
File the Articles of Association
Be sure to thoroughly review the Articles of Association form before filing.
You may also have to pay a filing fee, which varies from state to state.
Once your form is approved, the Secretary of State’s office will issue you with a certificate to prove that your LLC has been formally registered.
You can use this certificate to perform tasks such as setting up a business bank account and registering for a VAT number.
Related: Choose your business structure | australiabusinessblog.com
Create an LLC business agreement
Now that the state has approved you, it’s time to create an operating agreement.
An operating agreement outlines all the details of the financial, legal, and managerial rights that all members of the LLC are entitled to.
Specifically, it includes how profits are distributed, how members can leave the LLC, and who is required to contribute capital.
You can create your operating agreement, especially if you are a single-member LLC. Hiring an attorney can be a good option for more complicated situations, such as with multi-member LLCs.
Related: Why So Many LLC Business Agreements Fail | australiabusinessblog.com
Keep your LLC active
Now that your LLC has been created, you need to keep it active.
This means making sure your business is in good standing with your state. This may involve the LLC filing an annual report that keeps your company’s information up-to-date and paying an annual filing fee.
Related: company – The Many Benefits of Forming an LLC | australiabusinessblog.com
Start an LLC today
With benefits ranging from business flexibility, various tax options, and personal asset protection, creating an LLC could be the next step your business needs to take.
By following the steps above and consulting an attorney in your area, you will soon be running your own LLC and reaping all the benefits.
Checking out australiabusinessblog.com’s other articles for more information about LLCs and other financial topics.