Any person starting a business, or currently running a business as a sole proprietor, should consider forming an LLC. This is especially true if you're concerned with limiting your personal legal liability as much as possible. LLCs can be used to own and run almost any type of business.
However, in some states some types of professionals must form special professional LLCs. An LLC can be used for a business of any size—from one-owner operations to businesses with many co-owners. LLCs are also the most common legal entity used to own rental and commercial property. Personal asset protection. An LLC provides its owner or owners with limited liability.
This means that means you—the LLC owner—are generally not personally liable for any debts incurred by your LLC business or most business-related lawsuits. Because you're not personally liable, creditors or people who file lawsuits against your LLC can't collect against your personal assets like your personal bank accounts, personal car, or home. Pass-Through Taxation. LLCs ordinarily provide their owners with pass-through taxation.
The profits or losses the business incurs pass through the business to the owner's personal tax return. Such profits are taxed at the owner's personal tax rates.
An LLC with two or more members is usually treated like a partnership for tax purposes. Again, profits or losses are reported on the owners' personal returns and taxed at their personal rates. Because LLCs are usually pass-through entities, their owners can qualify for the special pass-through tax deduction created by the Tax Cuts and Jobs Act.
This deduction took effect in and is scheduled to continue through An LLC is the simplest business entity to form and operate. Unlike with a corporation, it is not necessary to have officers and directors, board or shareholder meetings, or the other administrative burdens that come with having a corporation.
LLCs provide enormous flexibility when it comes to ownership, management, and taxation. There are no minimum or maximum limits on the number of owners--also called members--that an LLC can have.
LLCs can be managed by their members--that is, all the owners share responsibility for the day-to-day running of the business. LLCs also have the option of designating one or more managers to run the business. The managers can be designated members, nonmembers, or a combination of both. LLCs can also choose how they want to be taxed. They are usually taxed as sole proprietorships or partnerships, but SMLLCs and multi-member LLCs have the option of choosing to be taxed like a corporation.
This is easily accomplished by filing a document called an election with the IRS. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form and elects to be treated as a corporation.
However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form , Entity Classification Election PDF , to elect how it will be classified for federal tax purposes. An LLC may be eligible for late election relief in certain circumstances. In addition, if the owner never personally guaranteed or co-signed for the business's debts, his personal assets are not at risk if the business is in debt or declares bankruptcy.
This protection is similar to that afforded to corporation owners. Record-keeping and tax filing requirements are also typically more lax in a limited liability company than in a C- or S-corporation.
In some cases, a single-owner LLC can file business taxes on her personal income tax return. Most types of businesses can be limited liability companies.
Typically the only exception is a professional partnership, such as a law firm or doctor's office. Hence, the owner is one with the company and liable for any judgments and debts from business transactions. The owner's personal property is not protected from business debt or lawsuit. As the business grows, the owner's risk increases. A partnership has two or more owners. There are two types of partnerships :.
In a general partnership, both owners are held liable for the decisions the other partner makes. If someone sues your partner, you are included in the suit as well.
A limited liability company is a hybrid of the corporate, sole proprietorship, and partnership entities.
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