What Is LLC Status And Why Should I Become One?
If you’re thinking “what is LLC?” then this article is for you. In this article, I’ll go over what is LLC as well as what the alternatives to forming an LLC are.
Firstly, you need to know that an LLC simply stands for “Limited Liability Company”. It is one of five business designations that you can choose from when setting up your business. The other four options you can choose from are the sole proprietorship, partnership, C corporation, and the S corporation.
Each business model has its advantages and disadvantages, so you should think carefully before you make your choice.
The most basic business entity is the sole proprietorship. This type of business is available to an individual that creates a business by themselves. Most businesses start out this way because it requires the least amount of paper work and is the easiest type of business structure to set up.
A sole proprietor can work by himself or can hire employees to work for him. Sole proprietors that work by themselves will only be responsible for income taxes and self-employment taxes. They will have to pay this in four quarterly payments or face estimated tax penalties. However, these penalties are generally very low.
Sole proprietors will need to pay additional taxes for their employees and should probably get insurance for them as well. More information on this can be found at http://www.irs.gov/businesses/small/article/0,,id=98202,00.html
The downside to forming your business in this way is that you essentially are your business. This means that if your business gets sued, you get sued as well. A person can lose everything he or she owns in a lawsuit brought on by their business. This also means that creditors can come after an individual’s wealth when the business fails. Also, a person can not start this type of business with a partner.
Forming a partnership will get around the last problem of the sole proprietorship, but will not get around the other issues that a sole proprietor has. This being said, a partnership is easy to form and is not very “paper work intense.”
What is LLC entity’s benefits over the partnership and sole proprietorship?
One of the great benefits of LLC is that it will protect the personal assets of the business owner. Essentially, a person that gets sued or chased down by an unpaid creditor will only lose what they have invested into the LLC. This is a huge benefit and is one of the main reasons for a sole proprietor to find out what is LLC.
In addition to this, the LLC will still receive the tax benefits that a sole proprietor receives. Financial losses of an LLC can be written off against other sources of income. This is great for the “moonlight entrepreneur” that works a full time job while he or she is starting their business.
What about the other types of companies?
A C Corporation and an S Corporation allow a company to have shareholders. However, these two entities are taxed a bit differently from each other. The C Corporation gets taxed as a corporation when profits are earned, and gets taxed when it pays out dividends.
However, this type of corporation has many tax breaks and write offs that an LLC cannot take advantage of. For this reason, it is crucial that you talk to a tax professional when asking “what is LLC going to do for me?”
The S Corporation will pass the tax burden directly through to the shareholders, but will not be taxed twice.
What is LLC entity’s benefits over the C and S corporations?
The LLC does not require nearly as much paper work and therefore does not have to pay out as much money to their accountant. Also, the less paperwork a business has to do, the more time it can spend making money.
LLC’s are only taxed once, and their rate of taxation is based off of how much profit they have made as an individual. An interesting and possibly beneficial aspect of the LLC is that it can be owned by a multitude of corporations. This means that several corporations can get together and create a separate entity under an LLC.
I know what an LLC is and what the benefits are, but are there any downsides to owning one?
An LLC does not allow the company to take on shareholders. This means that an LLC does not have the ability to raise capital by selling shares. Fortunately, business structures are not set in stone and a business can always change from being an LLC to being a C or S corporation without much trouble.
For more information, and before making any significant business decisions, you should always consult with your lawyer and/or CPA.