Do You Need an LLC? Choosing the Right Business Structure
Do I need an LLC? What's the difference between an LLC and a corporation? Why is everyone talking about S-corps now? These are questions clients ask us all the time.
We want you to be informed about the decision you make when forming your new business entity.
Here's an overview of different business structures: LLCs, S-corps, and C-corporation and how they impact your personal liability, taxes, and how you run your business.
Do you have questions about forming an LLC or corporation? Read this blog then create your LLC or corporation online.
An LLC, or Limited Liability Company, is a business structure that's separate from the owner(s). Forming an LLC protects the owners' personal assets from litigation if the business gets sued. LLC owners are called members and you can have as many LLC members as you'd like. In most states, an LLC must be renewed annually with the state of incorporation to remain compliant.
We highly recommend that all LLC members establish and maintain a business account separate from any personal transactions. Mixing business and personal transactions, called "piercing the corporate veil" could result in loss of your personal asset protection (your house, car, retirou lose that protection and your business gets sued, you could potentially lose those things in a lawsuit.
LLC Default Tax Classification
As a single-member LLC, your default tax classification is a sole proprietorship. That means that your business profits or losses will be included on Schedule C as part of your personal tax return. You will pay self-employment taxes on your business income. The IRS does not recognize LLCs as taxable entities therefore the members of the LLC are taxed individually.
Keep in mind that electing to be taxed as a different entity type does not mean you lose your LLC status - this is how the IRS recognizes your business since they don't recognize LLCs for tax purposes.
A multi-member LLC will be taxed as a partnership per the IRS default tax classification. In this case members must file Form 1065, US Return of Partnership Income, to report the total income for the LLC being taxed as a partnership. Each LLC member will receive a Schedule K-1 to detail their individual shares of income, deductions, and credits to file along with their personal income tax returns. Each member will pay self-employment tax on their share of the partnership's earnings.
Alternate Tax Elections
A single-member LLC can also choose to be taxed as an S-corporation for added tax benefits. With S-corporation status the LLC members work FOR the S-corporation therefore owners get paid wages. When you're paid wages, you're not self-employed so you don't pay self-employment taxes like you'll pay being if you elect the IRS default tax classifications. Any distributions outside of wages, however, you will have to pay tax on.
You can also choose to be taxed as a C-corporation. C-corporations are subject to double taxation because the business profits are taxed at the corporate level and those same profits are taxed again when paid to shareholders. Some think a C-corp is reserved for large, publicly traded organizations and in some cases, depending on the goals, it could make sense for your business.
Other Things to Consider
If you choose to form an LLC, you'll need to appoint a registered agent. A registered agent, also called a statutory agent, is a person or business that's receives legal documents on behalf of your business. If your business is served with legal papers or if you need to renew your entity with your state, your registered agent will receive these documents and forward them to you. Your registered agent must have a physical business or residential address in the state where your business will be registered.
Depending on your state, you may have the option to serve as your own registered agent. If you choose to be your own registered agent, note that your physical address will become part of your Secretary of State's public records. If you run your business from your home, that means your home address will be published. You cannot use a P.O. Box for your registered agent's address.
You'll get free registered agent services for one year when you form your entity with us. Don't worry about having to be available everyday in case your business is served or having your home address published. We'll handle creating your entity, monitor compliance requirements for your state, and elect S-corporation status for added tax benefits.