A limited liability company (LLC) is defined as a type of business structure where owners of the LLC are called “members” and are partners in a business entity with all the protection of a corporation plus the ability to pass through any business profits and losses to their personal income tax return.
The purpose of a limited liability company (LLC) is to form a type of business entity that passes through all profits and losses to the owners’ personal income tax returns while still retaining all the benefits of a corporation.
Pros of an LLC
- Establishing an LLC has several benefits:
- It is not possible for LLC members to be personally liable for business decisions or actions taken by the LLC.
- Business profits and losses can be divided among members however they wish; it doesn’t have to be equal, though everyone files their own income tax returns claiming their own profits and losses.
- LLCs require much less paperwork than Sub Chapter S corporations, which are similar to LLCs in many ways.
Cons of an LLC
- There are relatively few disadvantages to forming an LLC:
- The LLC must be dissolved if a member dies or leaves, and a new LLC must be formed.
- LLC members must pay 15.3% self-employment tax since they are considered employees of the LLC.
How to form an LLC
Due to the fact that an LLC is separate from you as an individual, you will need to choose a name that differs from your own and doesn’t already exist in your state. Designer Shoes Galore LLC, for example, would be your official business name.
Following the selection of a business name, you’ll need to file Articles of Organization, which includes the company’s name, address, and all of the members’ names. To be sure, double-check with your state’s Secretary of State before filing articles of organization. Hawaii, Alaska, and Utah do not have state secretaries, and in Massachusetts, Pennsylvania, and Virginia, the Secretary of Commonwealth is responsible for filing documents. Filing fees are typically charged as well.
Following the filing of the Articles of Organization, you will need to apply for any business licenses and permits needed to operate legally.
Last but not least, determine whether your state taxes LLC income by contacting your state’s income tax authority. There is no federal taxation of LLC income, but some states do tax LLC income.
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