Basic Overview of Forming a Limited Liability Company

Basic Overview of Forming a Limited Liability Company

When you go into business for yourself, you have options when it comes to the type of business structure you choose. You might be a sole proprietor, partnership, limited liability company, or corporation. Which you choose will affect factors such taxes, liability, and required paperwork.

If you’re thinking that a limited liability company (LLC) is the right choice for you, here’s what you need to know about this option and five things you’ll need to do to form your company.

Background on Limited Liability Company (LLC)

The benefit of an LLC is that unlike corporations, LLCs aren’t taxed as separate business entities. All members of the LLC report profits and losses of the business on their personal federal tax returns. The business does not pay federal taxes. Therefore, if the LLC incurs a debt or is sued, your personal assets are generally exempt.

Under an LLC, the IRS treats your business as if it were a sole proprietorship (if you are the only member) or a partnership (if there are multiple owners), unless you choose to be taxed as a corporation. However, the federal government automatically classifies and taxes certain LLCs as corporations.

Either way, you’re taxed on your share of the profits as part of your personal tax return (Schedule E). Though not required in most states, your LLC may have an Operating Agreement, which discusses financial decision-making, such as how to distribute profits and losses.

Under an LLC, you are self-employed and aren’t subject to tax withholding. Therefore, you must pay estimated taxes and self-employment taxes quarterly. However, an owner not actively involved in the LLC may be exempt from paying self-employment taxes. Talk to your accountant.

As a small business owner, you must assess, collect, and submit sales tax to the appropriate state authorities. In addition, you must pay state taxes (if applicable in your state) through your individual tax return.

Forming a Limited Liability Company

Each state has its own guidelines on the steps you need to take to form an LLC. However, here are five things you’ll need according to the Small Business Administration:

Business Name. Choose one that doesn’t currently exist in the state, include LLC in the title, and avoid restricted words, such as ‘bank’.

Articles of Organization. This includes information such as your business name, address, and the names of members.

Operating Agreement. This is not required in many states; however, it is a good tool for structuring multi-member operations.

Licenses and Permits. Find out what federal, state, and local business licenses and permits you need based on industry, state, and locality.

Employees. There are a variety of good sources to help you learn what you need to know about hiring staff, such as your state Chamber of Commerce, Society of Human Resources Management (SHRM), and the Small Business Administration.

Additionally, some states require new businesses to publish a statement in the local paper about their LLC formation. Check with your state small business development center.

While small business owners have options beyond forming an LLC, it is one of the best choices available. If you’re still unsure whether to incorporate, talk with your attorney.

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