Header Right

start a business

10 Things to Know About an LLC

by

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.

  1. 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
  2. Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
  3. 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.
  4. Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
  5. An LLC may borrow money in its own name and is responsible for repayment of the debt.
  6. 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.)

  7. Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
  8. LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
  9. If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
  10. 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.

Source/Disclaimer:

1Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.

How to Choose the Right Business Entity

by

business structureCritical Choices: How the Business Entity You Select Impacts Your Taxes and Business Decisions

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under.

The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures. Although you can determine this on your own, you may want to consult an advisor to discuss the pros and cons of each type of entity.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued.

When your business exists as a separate entity, the business itself can apply for credit, and these types businesses can continue to operate when you decide to move on or retire.  During this process there is more to consider than just taxes so you don’t want to take this lightly.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your business are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Operating out of these types of structures could cost you thousands in unwanted taxes each year. This is why we recommend doing your research so you aren’t giving your hard-earned money away.

Limited Liability Companies (LLC)

It is common to see the initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation.

With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated than operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows.

Depending on your situation there are more decisions when operating as an LLC that can be considered to save in taxes. This is something our firm analyzes for each company.

In Summary

This is a very high level overview of how to choose an entity. We haven’t even covered incorporating or electing to be an S Corporation. With the new tax laws in place the review of entity selection has been an important part of discussions and planning.

Whether you own a start-up or a company that has been around, this topic has become critical to review and analyze.

If you are starting a company, want to consider the differences in each type of entity as it relates to your business or analyze your current company to determine if you need to consider a switch to a different entity, please contact us today!