Are you self-employed or planning to start a company? When you set out to work for yourself, you can form a legal entity for your business. Relatively simple to form, LLCs are one of the most popular entities.
Does an LLC make sense for you? Learn the basics and consider how a lawyer can help you through the process for forming one for tax purposes.
What Is an LLC?
A limited liability corporation (LLC) is a legal business entity. An LLC is formed in the state your business operates.
Who Needs an LLC?
An LLC can be used for many different types of businesses and company structures. Independent contractors working as sole proprietors can form an LLC. A larger company with multiple owners and employees can also operate as an LLC.
An LLC helps to mitigate a business owner’s risk. If your business is sued, an LLC ensures your personal assets are separate from the business’s assets, giving you personal liability protection.
Anyone who wants to separate their business assets from their personal assets could benefit from forming an LLC.
What Are the Tax Advantages of Having an LLC?
So, an LLC can protect your personal assets, but what are the tax advantages of forming one?
First, an LLC serves as a pass-through entity. This means any earnings from the business pass through the LLC to the business owner. You do not need to pay corporate taxes. Rather, the income, or loss, of the business is taxed at the owner’s individual income rate. The current federal corporate tax rate is 21 percent, while your personal tax rate will be determined by your income bracket.
You also have a choice of how you want to be taxed. Your LLC can be taxed in different ways, such as:
- Single-member. If you are the sole proprietor, you can form a single-member LLC for your small business.
- Multi-member. A business with two or more owners can be operated as a multi-member LLC. This structure allows owners to break down their business’s profits and losses among themselves, which then passes to their personal income tax returns.
- Corporation. You can choose to have your LLC taxed as a corporation. In this case, the business owners are considered shareholders rather than self-employed. Electing to use this tax structure can reduce the amount you owe the IRS.
How Do You Form an LLC?
Choosing a name is the first step to forming a legal business entity. From there, you will file articles of organization for the LLC in the state you plan to operate. You will pay a filing fee to the state.
Each year after that, you will be required to file an annual report and, in most states, pay a fee. The annual fee will vary from state to state. For example, Idaho does not charge an annual fee, while California charges an $800 annual franchise tax and a $20 annual statement of information fee.
How Can a Lawyer Help?
You are not required to work with a lawyer to form an LLC. Business owners are able to go through this process on their own, but sometimes it makes sense to get some help.
A lawyer who specializes in LLC formation can make the process easier for you by:
- Helping determine the best LLC structure. If you are not sure which type of LLC makes the most sense for your business and tax purposes, an experienced attorney can walk you through your options.
- Creating an operating agreement. An operating agreement is an important document for LLCs with multiple owners. A lawyer can help LLC owners outline how the company will be operated.
- Registering the LLC. An LLC needs to be registered with the state in order to be officially formed. A lawyer can handle this process.
This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
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