Congratulations! You’ve decided to start a new business and finally turn your dream into reality. You’ve formed a sound business plan, secured funding and acquired a clientele. Eventually, a drearier element of business will need to be addressed as well: taxes. More specifically, the type of entity your business will operate and be taxed as needs to be determined. This is one of many small business accounting decisions you will need to make when you start your own company. Many business owners choose to operate as a Limited Liability Company (LLC) because of its legal and tax benefits. Below is a brief introduction to LLCs and their potential benefits.
An LLC is a business entity registered with a state’s Secretary of State. All 50 states allow a business to be registered as an LLC. There is no restriction on the number of owners (referred to as members) of an LLC.
As its name implies, an LLC offers its members “limited liability”; under most circumstances, members are not personally liable for any of the company’s debts or obligations.
As stated before, an LLC is a business entity, not a taxable entity; there is no “LLC” tax return a business can file. Instead, an LLC must choose what kind of taxable entity it wants to be taxed as. Options include being taxed as a C corporation, S corporation, partnership, or sole proprietorship/schedule C business. The most common tax entities that LLCs choose to be taxed as are sole proprietorships and partnerships, as described below.
Being a sole proprietorship is the simplest way to operate a business. Because there is no distinction between the business and owner, no business filings are required, and no separate tax returns need to be filed. However, the lack of distinction between the business and owner also means that you, the owner, are personally responsible for any debts or obligations of the business. If you aren’t worried about personal liability, then there’s no need to become an LLC. If, however, your business has grown to the point where personal liability becomes a real threat, becoming an LLC might be what you’re looking for. An LLC allows for a single member ownership, commonly referred to as a “single-member LLC.” As a single-member LLC, you can now enjoy the limited liability of an LLC, while still enjoying the tax simplicities of not having to file a separate tax return. Consult a tax advisor, if you need small business tax help.
There are multiple advantages to operating as an LLC and being taxed as a partnership. Many partnerships are structured with a general partner and limited partner. The general partner is personally liable for the business’s debts but is allowed to operate in the business’s day-to-day operations. The limited partner simply invests money into the partnership and has no personal liability but cannot operate in the day-to-day operations of the business. Operating as an LLC combines the benefits of the general and limited partner, but without the drawbacks. As LLC members in a partnership, they have the limited liability of a limited partner and the management freedom of the general partner.
The unique characteristics of LLCs – personal liability protection, flexible tax options, and unrestricted management roles – are enticing benefits to consider when choosing your business’s legal and tax structure. However, this introduction to LLCs only scratches the surface of some of the complexities that need to be considered. As always, it is best to consult your tax advisor before moving forward with your business entity decision.
When you need small business tax help or if you have any small business accounting needs, let us know. Your Mahoney Tax Team is here to answer any questions you may have.