Limited Liability Companies (LLCs) are state-defined entities which may be thought of as being a business hybrid entity, with a few features of both partnerships and corporations.
LLCs are popular mostly because they are simpler to operate, and more flexible than type S or C corporations. Some think LLCs save taxes, but usually, they don't.
In certain ways, A LLC is similar to a corporation. Both LLCs and corporations provide some level of liability protection for owners and/or shareholders, and officers.
One way a LLC is different, is that LLCs have owners, and corporations have shareholders. A LLC may have several owners, named "members" or "partners", named members, in the rest of this article.
The LLC's partnership agreement describes the member's relationships in the LLC, and contains an ownership agreement.
A LLC can have at least one managing member, and may also decide to have officers. A LLC usually has an operating agreement, that describes the LLC's function. LLC members may be any combination of corporations, individuals, or other LLCs.
Double taxation happens when a company first pays taxes on their profits; and later their officers, employees, and shareholders, are taxed again on each of their incomes.
In the past, one of the biggest reasons that LLCs were picked, was for their possible saving on taxes. LLCs avoid the possible double taxation issues that C-type corporations can have.
However, double taxation is not such an important financial issue now, as the IRS has caught up, and eliminated nearly all of the ways taxes could be saved on both common and creative kinds of income.
Now, there seems to be no tax disadvantages or advantages to starting a LLC. No matter what corporate structure or partnership one picks, they must pay taxes. Tax collection might be split in different ways, however one way or the other, income is taxed.
Single-owner LLCs are taxed the same as sole proprietorships, and must do the same Schedule C and 1040 tax return, that a sole proprietor does.
Single-owner entities usually do not get the same liability protection that large companies get. Multi-Multiple-owner LLCs may potentially offer stronger liability protection than some corporations.
Multiple-owner LLCs get taxed as partnerships. Partners in the LLC file the same 1065 partnership tax return, as needs to be done with any conventional business partnership.
LLC owners are considered to be self-employed, and need to pay the self-employment tax of approximately 15%, on the total net income of the business.
In C or S corporations, only the salary paid to employees is subject to employment tax. The IRS monitors salaries, and defines income as salary, when they think a company isn't paying adequate salaries. Payroll taxation is expensive.
The actual advantages of LLCs over S or C corporations is that they are:
1) Much more flexible in ownership. 2) Easier to operate. 3) Not subject to as many corporate formalities or reporting requirements. 4) Owners of a LLC may distribute profits any way they want.
Most often, the state, county, and city, requires LLCs to pay them the same taxes, fees, and registration fees, as corporations must. Also, many states require LLCs to hire an accountant to do the LLC's tax returns.
LLCs no longer save you money. The best reason to choose to start a LLC, is the flexibility that it offers.
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