Whenever we meet with clients who want to start a business or invest in real estate, the discussion of what type of entity to select is always part of the discussion. The LLC has become a very popular entity for businesses for many reasons including protection, tax planning, flexibility and other reasons we won’t cover in this post.
An LLC may not always be the right choice for entity selection, but that is something we discuss during those consultations. Below we share some insights to help you decide if an LLC is the right way to go for your business.
You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. Here are 10 things you may not know.
- An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.1
- Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
- The owners of an LLC are called members. There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
- Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
- An LLC may borrow money in its own name and is responsible for repayment of the debt.
- An LLC is usually treated as a partnership for federal income tax purposes if there are two or more members. If there is a sole member, it is considered a disregarded entity for tax purposes.
(The remaining four points assume partnership treatment.)
- Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
- LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
- If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
- For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.
An LLC is but one structure you might consider using for a business venture. The input of a professional may be helpful in determining which type of arrangement will best meet your objectives.
BGMF CPAs can help guide you through the entity selection process as part of your planning and strategy to start and operate your business or real estate venture. There are some great tax planning strategies that can be utilized through the LLC that can also be discussed. Talk with one of our advisors today.
1Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.