I am not a lawyer, I am a Judgment Broker. This article is my opinion, based on my experience in California, and laws vary in each state. If you ever need legal advice or a strategy to use, please contact a lawyer.
Limited Liability Companies (LLCs) are state-defined entities that may be thought of as being a business hybrid entity, with a few characteristic of both corporations and partnerships.
LLCs have become popular primarily because LLCs are more flexible, and are simpler to operate than type S or C corporations. Many believe LLCs save on taxes, but most often, they don’t.
In some ways, LLCs are similar to corporations. 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 corporations have shareholders, and LLCs have owners. A LLC may have several owners, named “members” or “partners”, called members, in the remainder of this article.
A LLC’s partnership agreement defines the member’s relationships to the LLC, and contains the ownership agreement.
A LLC can have one or more managing members, and may also decide to appoint officers. A LLC usually has an operating agreement, that describes the LLC’s function. LLC members can be any mixture of corporations, individuals, and other LLCs.
Double taxation occurs if a company first pays taxes on any profits; and then their officers, employees, and shareholders, get taxed again for each of their incomes.
In the past, one of the primary reasons that LLCs were chosen, was for their potential tax savings. LLCs avoid the potential double taxation issues which C-type corporations may have.
However, double taxation isn’t such an important issue now, because the Internal Revenue Service has caught up, and eliminated nearly all of the ways taxes could be saved on both common and creative types of income.
These days, it seems there is no tax advantages or disadvantages to starting a LLC. No matter which corporate structure or partnership one chooses, they must pay taxes. Tax collection might get split in several 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 enjoy. Multi-Multiple-owner LLCs might potentially offer stronger liability protection than many corporations.
Multiple-owner LLCs get taxed the same as partnerships. Partners in a LLC file the same 1065 partnership tax form, as would be done with any conventional business partnership.
Owners of LLCs are considered to be self-employed, and must pay the self-employment tax of approximately 15%, on the total net income of the business.
In S or C corporations, only the salary paid to employees is subject to employment tax. The IRS monitors salaries, and defines income as salary, if they think a company isn’t paying high-enough 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 LLCs can distribute profits any way they want.
Usually, the state, city, and county, requires a LLC to pay them the same fees, taxes, and registration fees, that corporations need to. Also, many states require LLCs to hire an accountant to do the LLC’s tax returns.
A LLC no longer saves you money. The best reason to choose to start a LLC, is the flexibility they offer.
