Limited Liability Companies (LLCs) are a newer form of business entity than corporations. They were designed to provide an easier and simpler business form for small business owners. Small businesses are usually defined by a small number of owners and not by the amount of profits. LLCs are designed to provide liability protection for the owners and avoid the double taxation that corporations face.
LLCs are the preferred business entity for most smallbusiness owners. They also provide a greater flexibility when defining the managerial and financial arrangements among the owners than corporations do. However, while generally simpler than corporations to form, because of this flexibility they can quickly become much more complicated depending on the needs of the owners.
LLCs also provide the ability to have different classes of owners which can be advantageous if owners are receiving different preferences when profits are allocated. While most small business owners will keep it simple, that’s not always the best way to proceed. We are always willing to discuss the best way for you to proceed.
This flexibility comes from the fact that LLCs are like “partnerships” in how they are run and like “corporations” in how they provide liability protection. The most important document in an LLC is the Operating Agreement. This is like a partnership agreement and defines the relationship regarding both the management structure and the financial arrangement among the owners. This document is paramount to legitimatize your business if ever challenged in court. And you must run your company according to its terms.
LLCs are taxed like partnerships. This means that the profits come out of the LLC and are then claimed on each owner’s personal tax return as salary income. If there is more than one member, you must issue K-1 statements to all the owners that define how much of the gain or loss is attributable to each owner. Further, all the profits are subject to a Self-Employment tax (for an explanation, see Taxes). This tax can be minimized by filing a form with the IRS stating that the LLC wants to be taxed under Subchapter S of the tax code (for an explanation, see S-Corporations & LLCs).
ALL LLCS REQUIRE NUMEROUS DOCUMENTS IN ORDER TO BE VALIDLY RUN AND MAINTAIN THEIR LIABILITY PROTECTION. SIMPLY FILING ARTICLES OF FORMATION WITH THE STATE DOES NOT PROVIDE ALL THESE DOCUMENTS. PLEASE CONSULT WITH OUR OFFICE BEFORE FILING ARTICLES.