Starting a new business is exciting, but can also be very intimidating. There is such a variety of legal classifications to consider when forming your business entity and it can be confusing to know which one is right for you. Currently, two of the most popular small business structures are the Limited Liability Company (LLC) and the S Corporation (also called Subchapter S Corporation). There are many different factors to consider from both a legal and taxation standpoint. Today I will focus on LLCs and in the upcoming weeks, explore additional business structures to make sure you are off to a running start.
The first thing you’ll need when organizing your business is to determine the legal structure. An LLC is a legal entity that protects the owner or owners by giving a limited amount of liability from things such as business debt. Businesses that are not organized as a legal entity and do not file with their state do not have the same protections in place as registered businesses. These businesses are called sole proprietors and there is no separation between their assets and the business. LLCs have to be registered with the state in which they are doing business and you will need to submit articles of organization detailing how you will conduct legal business. Secretary of State requirements vary from state to state.
The LLC has a default tax status if it has a single owner to be a disregarded entity for tax purposes. This means it could file taxes on Schedule C, E or F of the owner’s tax return. If there is more than one owner the default tax status is that of a partnership. An LLC though has been allowed by the IRS regulations to make a check the box election to not be considered a disregarded entity but to be taxed as a C corporation (taxed at the corporate level) by filing form 8832. The entity can also can file a form 2553 to be taxed as an S Corporation, another pass through entity. Each of these tax statuses have specific advantages and disadvantages and should be carefully examined to ensure which one will be the right fit for you.
The tax election an LLC should take is determinant on the goals and needs of the business. In following posts I’ll discuss in more detail specific aspects of LLCs and other business structures such as: sole proprietorship, partnerships, and C and S corporations along with which tax statuses most benefit an LLC.