You've thus discovered a sound business concept and are enthusiastic about realizing it. You've also done your homework and come to the conclusion that the best method to safeguard your legal rights and those of your company is to create a legal entity.
You therefore decide to establish a limited liability corporation (LLC), but how do you do it and what are the things you need to think about? The main benefits and drawbacks of forming an LLC in the US are covered in this article along with preparation tips.
Source: https://bbcincorp.com/offshore/articles/us-limited-liability-company-advantages-and-disadvantages
What benefits do LLCs offer?
There are several benefits to choosing an LLC as your business form, including the following:
Adaptable tax policies
LLCs benefit from greater tax flexibility. LLCs can choose to be taxed as S-Corporations or C-Corporations in addition to the two default tax statuses provided by the IRS, depending on the needs of the firm.
Every tax status has advantages and disadvantages, so it's crucial to speak with a tax adviser to determine which one is best for your company.
liable for single proprietorship tax
For taxation reasons, a single-member LLC is regarded as a sole proprietorship, which implies that the member's personal tax return must include the business income. This reduces paperwork and eliminates the requirement for the member to submit a separate business tax return.
Partnership taxed
A multi-member LLC is classified as a partnership by the IRS for tax reasons unless it submits a request to be treated as a corporation, in which case it is exempt from paying taxes on its commercial revenue. Instead, the members receive a "pass-through" of the profits and losses, which they then report on their individual tax returns.
Since the revenues flow directly to the owner and are taxed at the personal income tax rate when an LLC is taxed as a partnership, this helps LLCs avoid double taxation.
When corporate profits are taxed twice—once at the corporate level and again at the individual level—this is known as double taxation.
An illustration of a double tax is when a corporation's profit is taxed both when it is earned and when it is delivered to shareholders as dividends.
A corporation does not get a tax break when it pays dividends to its stockholders. The corporation's losses are not deductible by shareholders.
liable for C company tax
Your LLC's members have the option of choosing to have the business categorized as a C-corporation. While the LLC would be required to file a corporate tax return and pay taxes on business income in this scenario, it is exempt from paying self-employment tax.
However, because corporate profits are taxed twice—once when they are produced at the corporate level and again when they are transferred to the members as dividends—this structure is liable to double taxation.
liable for S company tax
By submitting IRS Form 2553, an LLC can decide to be taxed as a S corporation. In addition to providing a tax deduction for social security and Medicare tax, this would free the LLC from corporate income tax.
The business will be subject to pass-through taxation instead, much like a partnership.
How Does an LLC Get Taxed as a S Corp?
For her bitcoin business, Beth creates an LLC and chooses to have it taxed as a S company.
The business makes $200,000 a year. Beth receives a salary of $100,000 as an employee, and the additional $100,000 in earnings are passed through to her as a S corporation payout and recorded as such on her individual income tax return.
Bath nor her employer are required to pay Social Security or Medicare tax on this sum because it is not regarded as employee wages. The only payment is self-employment taxes, which come to $15,300 (15.3% x $100,000 = $15,300).
If Beth hadn't chosen S corporation status for her LLC, she would have been required to pay self-employment tax on her full $200,000 profit. This requires paying an additional $1,252 in Social Security taxes and $2,900 in Medicare taxes (total sum for both employer and employee).
liability defense
By reducing members' financial risk exposure and preventing assets from being used to settle business obligations, an LLC shields members from personal culpability. The assets of the members, such as their homes, automobiles, properties, or investments, are often protected against seizure if the LLC is sued or owes money.
The Operating Agreement that each member of an LLC creates must outline the level of liability protection the member seeks. While some members might want total liability protection, others could be willing to take up some personal risk in exchange for receiving a bigger cut of the profits.
All members may be required to sign a personal guarantee, which specifies the conditions under which they may be held accountable for the LLC's debts, in accordance with the Limited Liability Company Agreement.
You risk losing this important precaution and being held accountable if your LLC engages in fraud or criminal activity. For instance, if you sign a contract without authorization as the owner of an LLC and the LLC breaches the contract, you could be held accountable.
While an LLC does provide some personal liability protection, it's crucial to be aware of its limitations and take precautions to lower your risk.
If you value your privacy, having an LLC can help business owners keep their personal and professional matters distinct.
You can form an LLC anonymously since certain states do not require LLCs to list members on formation forms. However, this isn't necessarily the ideal strategy from a company perspective because it might make obtaining a bank account and establishing business credit more challenging.
It's also crucial to remember that each state has its own regulations regarding LLCs, so find out what kind of disclosure is needed by contacting the Secretary of State's office in your state.
Consider Wyoming or Delaware if identity protection is your top concern; both states have outstanding company privacy legislation.
Additional benefits of LLCs
minimal requirements
Compared to corporations, LLCs have less filing requirements and formalities, and members are expressly excluded from the following duties:
Annual general meetings are held under tight record-keeping guidelines.
keep records of the shareholders, directors, officials, and staff
Additionally, you can alter the provisions that control your LLC formalities in an Operating Agreement as necessary.
managerial adaptability
There are two management strategies you can select from:
All members can participate in the management and decision-making of the organization under a member-managed model.
A manager-managed model is used, in which members designate one or more managers to oversee daily operations and make business decisions on their behalf.
This enables you to decide how to run your business most effectively based on the knowledge, passions, and availability of your team.
simplicity of setup and upkeep
The LLC requires minimum initial paperwork and has affordable setup costs. The incorporation procedure is simple; you just need to submit the Articles of Organization to the Secretary of State's office in your state and pay the necessary filing fee.
To maintain your status as a legal business entity after creating an LLC, you must submit an annual report and pay an associated fee. State-specific standards vary, but they are typically much less onerous than corporate ones.
What are the drawbacks of LLCs?
Before establishing your company as an LLC, take into account the following potential drawbacks:
limited options for investing
Your capacity to raise money may be constrained because an LLC is unable to issue shares to outside investors. You must change your LLC into a corporation in order to draw in outside investors, which may be a time-consuming and expensive procedure.
Additionally, it is challenging to transfer LLC ownership because investors cannot join without the approval of all other members.
Even if all members consent to the transfer, certain states have the right to reject it, barring exceptional circumstances like a member's death, divorce, retirement, or other similar occurrences.
Added tax liability
The LLC may incur additional fees depending on the state you choose, such as:
franchising fees
Some states charge LLCs this in exchange for the right to conduct business there (e.g., California, New York, Delaware, etc.).
Franchise tax may be a set amount or a portion of the LLC's earnings, depending on the laws of the state.
Occupational tax
In several states, LLCs with employees are required to pay federal employment taxes, namely Social Security (6.2% for the employer and 6.2% for the employee, for a total of 12.4%); Medicare (1.45% for the employer and 1.45% for the employee, for a total of 2.9%); and the 6% unemployment tax.
ongoing expenses
An LLC must pay an annual fee to maintain good legal standing. While state-specific LLC renewal costs vary, they are often greater than those for other company models.
Your maintenance costs may be considerably greater if you decide to set up your LLC as a series because additional documentation must be filed for each series. To conduct business in other states, you could also be required to pay foreign qualifying fees.
reduced structure
The lack of stringent regulations gives LLC members more latitude in managing their businesses, but it also results in less structure and increased risk for the business. For instance, it could be challenging to hold members accountable for their conduct if they are not obligated to hold frequent meetings or keep minutes.
Additionally, there is a chance that members won't be able to reach a consensus on important corporate choices, which could cause the corporation to become paralyzed or even collapse.
An excellent operating agreement can reduce risk. Although it will cost more to have an attorney draft it for you, it will safeguard your LLC from any member disputes and make sure everyone is in agreement regarding how the business is run.
An LLC's advantages and disadvantages are clear to observe, but how do you know if it's the right structure for you?
To assist you with choosing the best business entity type, we've developed a US Business Entity Selection Tool.
closing remarks
As you are now aware, creating an LLC has both benefits and drawbacks. You'll feel more certain that you're making the greatest choice for your business if you weigh both sides of the argument.
If you're still not sure if an LLC is the best business form for you, speak with our helpful expert for assistance in making your decision. Send us a message at service@bbcincorp.com, and we'll get back to you as soon as possible.
Comments