WHAT IS AN LIMITED LIABILITY COMPANY -- LLC?Even though most LLC companies are set up in CA, NY, TX, PA, GA, and FL, the LLC state business entity organizational structure started in Wyoming, in 1977, as a legal person. A legal person person is created by state law, namely, a state statute containing rules enacted by state legislature and regulations that control the life and operation of LLC legal person. Contrary to how a natural human life starts, the life of the legal person LLC starts and depends on the existence of two legal documents: namely, an LLC state certificate and a federal tax ID certificate. Like a natural person, the LLC is a state legal entity person starting its existence with a state filed LLC certificate called the articles of organization certificate, as is the birth certificate for humans, and with a federal tax ID number document as opposed to a federal social security number that a natural person is issued.
HOW DO I SET UP AN LLC?If you want to register the LLC yourself, it will cost you the state LLC filing fee and the fee that you pay to have the LLC operating agreement prepared. So, you will still have to pay state filing fees, which is about $50 and $400 or more though the average filing fee for an LLC is about $130 plus the fee to have the operating agreement prepared, about $50 to $200. Even though you do not need a lawyer to set up an LLC, you may want to hire one if you can afford it. Note, however, that the LLC set up expense is not deductible because IRS considers it a capital expenditure. On the other hand, if you file thru our service, you only have to submit a simple questionnaire and we do the rest. In all states in U.S., businesses must start by one or more owners, such as a natural person owner, a human, as a sole proprietorship or general partnership, or a legal person such as a limited partnership, corporation or LLC. The LLC being a person, in this case a legal person, can start and own businesses and be a business company operating one or more other businesses or companies as well as sue and be sued as any natural person would do. If you want to form an LLC for free, i.e., pay only the state fee and have someone prepare the documents for you, you can use www.Free-LLC.com to do so.
WHAT ARE THE BENEFITS OF AN LLC -- PROs and CONs of An LLC?Though, an LLC is touted as a benefit for small businesses, note that, Exxon Mobil, one of the largest companies in the world is also an LLC. As a partnership or multi-member LLC, you have the superb benefit of personal AND business assets protection. That is, regardless of the person and the reason you are sued, the plaintiff cannot access your personal or LLC business assets when you either sued personally or on a business LLC basis. With that being said, the plaintiff can still access the distributions of the LLC. For example, if you distribute assets or payments to the member owners, those distribution as subject to judgment claims. On the other hand, flexibility is surely the one advantage of LLC - i.e., you can treat an LLC as a sole proprietor, partnership, or corporation and still have corporate protections. One con disadvantage, however, is that in order to pay yourself wages from the LLC, you need to treat it as a corporation. Either way, you are protected from personal liability and business debts. There is a benefit for LLC taxes. For instance, single-member and partnership LLCs do not pay federal business tax because all income and profit pass-through. Since personal income tax is lower than federal tax, the LLC member realizes a profit benefit in paying taxes. Despite that, it depends on the state your file your LLC, note that some states impose a general LLC annual tax. For example, the state of California, imposes an $800 annual tax whether or not the LLC makes any profit. Similarly, Texas charges an enormous amount to set up your LLC, namely, $400, which is among the highest in the U.S., save the Illinois filing fee that is about $600. The C corporation LLC is subject to federal taxes. As of 2019, the corporate tax rate is 21%. So, the LLC is created by state law as a business entity structure like a corporation, but, as opposed to a C or S corporation, an LLC is more flexible than a corporation because the IRS allows LLC pass-through taxation as if it were a sole proprietorship or partnership. Note, however, that perhaps the biggest disadvantage con of an LLC is the self-employment tax because they are usually higher than the corporate tax rate. Despite the pass-through benefit, an LLC has many benefits even if treated as a C or S corporation as well. If you choose the single-member or partnership disregarded default IRS option, you may be subject to self employment taxes much as an S corporation is to such taxes. In turn, 1 or more natural or legal persons can be the owner members of an LLC. Contrary to a corporation that is owner by one or more shareholders, an LLC is owned by one or more natural persons that are the members, LLC managers and control the LLC and its profits.
WHO WOULD BENEFIT FROM AN LLC FORMATION SET UP?Even one person individual owners can file an LLC as a single-member disregarded entity LLC or Most starting businesses that want tax flexibility and liability protection should consider the U.S., business organizational entity Limited Liability Company, LLC for many reasons including judgment holder protection and reduction of IRS business taxes. For example, eBay, as well as other companies such as IBM have chosen the LLC structure for its benefits. In fact, more than 2/3 of all companies formed in the U.S. are formed as LLC companies despite that most small businesses do not need an Limited Liability Company LLC but they choose to become one because it provides personal and financial benefits and legal protections. Note, however, that special rules apply when an LLC has an operating loss. For more info, look at IRS publ. 925 for passive activity and At-Risk-Rules.
CAN I PAY MYSELF A SALARY OR BE THE EMPLOYEE OF MY LLC?Owner members of a pass-through entity LLC, such as an IRS disregarded entity, pay themselves with draws, i.e., distributions of profits by just taking money out of the LLC bank account -- a check or transfer of money from the LLC bank account to the personal bank account -- whereas LLC treated as C corporation may be used as as an employer to pay members and also get distribution reporting them in form 1065, whereas, single-members report them on schedule C of the LLC tax return. If you are a single-member LLC, 110% of the profits are yours, but if you are a multi-member LLC, each member gets the percentage mentioned and agreed in the LLC operating agreement. However, note that the C corporation LLC also pays half the employment tax and so is subject to state unemployment tax, disability tax, Social Security tax, and Medicare, and the LLC member pays the other half. Of course, as a disregarded entity, the members are not subject to such taxes; there only subject to self-employment taxes. On the other hand, note that as a C corporation employee, you may be able to collect unemployment taxes in some state in cases where the LLC has multiple members. As a single-member, it may be very difficult to receive unemployment benefits from an LLC. Business owners must pay a fee of $50, to $100 or more to file an LLC certificate and have an LLC operating agreement prepared as well as file annual reports and set up a business bank account but that is typical of any entity formed including sole proprietorships, and corporations.
HOW DO I ELECT TO BECOME A C CORPORATION LLC?In order to be treated as a C corporation, an LLC must file a form 8832 entity classification election, otherwise it is automatically classified as a disregarded entity and defaults as a sole proprietorship or partnership if more than one member sets up the LLC. Note that a disregarded entity LLC as a sole proprietorship files a 1040 schedule C for profit and loss and schedule E supplemental income or loss. However, a C corporation LLC file a 1120 form.