You may have heard the term before, but you were not sure what it was or if it is something you needed to explore for your business. This short article will address the who, what, when, and why of LLCs.
A Limited Liability Company (or LLC) is an organizational structure that clearly separates the owners’ personal properties from the organization’s debts and liabilities. It is not a corporation, which is commonly mistaken by some. In fact, you may run into some definitions of an LLC as a Limited Liability Corporation.
On paper, the LLC combines the finest parts of sole proprietorships, partnerships, and corporations, offering safeguards against liability, tax advantages, and management flexibility.
An LLC shares some characteristics with an S Corp, particularly the provision that distinguishes personal assets from business liability. Generally, you apply for an LLC if the business structure is more straightforward.
You might consider an S Corp with its distinct tax advantages if the company is larger. An S Corp, for instance, allows you to invite a maximum of 100 shareholders. In contrast, LLC calls its owners “members.”
An LLC is ideal for self-employed individuals, entrepreneurs, and independent contractors. You can run almost any business using this structure. However, federal regulations prohibit banks, insurance companies, and financial trusts from registering as LLCs. Some states also have similar prohibitions on specific professions like accountants and architects.
Of course, you don’t have to form an LLC to start a business since you can opt for several entities like a corporation, general or limited partnership, or sole proprietorship.
However, you might want to consider an LLC if the following applies to your case:
- You want to limit your personal liability concerning your business debts. The assets named to the LLC are subjected to creditor claims, including lawsuits.
- You want a hassle-free start. An LLC does not require you to provide voluminous documents to register.
- You want to invite investors to increase your financial flexibility. You can bring other people or members who will contribute cash, service, or property to your business. An S Corp, on the other hand, disallows you from asking venture capitalists to join your company.
- You want to enjoy certain tax benefits, which shall be elaborated on later in this article.
Besides protecting your assets, the LLC will also allow the IRS to tax you like a partnership. The following are the tax benefits you will enjoy by forming this type of business entity:
- The LLC will provide tax flexibility since you can opt to be taxed as a partnership, sole proprietorship, or a C Corporation and an S Corporation. Your decision will result in a maximum tax benefit for your company.
- You can claim as much as 20% in tax deductions, particularly with the passage of the Tax Cuts and Jobs Act of 2017. The law named LLC as one of the entities that can avail of the qualified business income deduction.
- Apart from the QBI, you can also apply for deductions to reduce income tax and other levies further. Among the categories you can include in your application include advertising, banking fees, charitable donations, travel expenses, vehicle maintenance, health insurance, and others.
- You can escape double taxation, which occurs when the corporation and the shareholders absorb dividend taxes.
When it comes to filing taxes, most LLC small businesses have a tax filing deadline of April 18, 2023. However, multimember LLCs, S corporations, and partnerships should have filed tax returns on the 15th of March, 2023.
Setting up an LLC varies from state to state. For example, in Minnesota, you must submit the “Articles of Organization” document and pay the filing fee to the Secretary of State.
The state charges $135 for the Articles of Organization if you do it by mail and $155 if you apply in person or online. There is also a reservation fee for your LLC name, which amounts to $50 or $55, depending if you file it online or in person. You also have to pay annual fees to renew your business.
You don’t need an attorney to file the documents, but it would help if an experienced bookkeeper supervises you to avoid mishaps.
However, you must have a business address in Minnesota and not just some mailbox, as this will violate the tenets of your Articles of Organization.
The simpler route would be to tap a bookkeeper to handle your LLC filings, especially since the professional service fee is very reasonable.
Lastly, Carefree Bookkeeping can also provide expert advice after considering state fees and other taxes.
For instance, an LLC may be simpler to register than a corporation, but it may be more expensive or complicated to maintain, depending on your specific situation.