What is an LLC (Limited Liability Company)

If you are a business owner consider making your business a legal entity. A limited liability company (LLC) is a legal status given to businesses. This establishment means the business will be its own legal entity and the owner(s) can be relieved of personal responsibility for their company’s debts or liabilities. An LLC can be owned by one or more individuals who will be referred to as “member(s).” An LLC owned by one person will be called a single-member LLC and an LLC owned by more than one person is called a multi-member LLC.

LLC Basics

Benefits of an LLC

1.) Personal Asset Protection

An LLC will protect a business owner’s assets like bank accounts, properties, and cars in the event of a bankruptcy or other legal disputes. The owner’s assets cannot be viewed as the company’s assets.

2.) Tax flexibility

Single-member LLCs are usually taxed as sole proprietorships and profits are only taxed once. The tax liability passes through to your personal tax return. This is known as pass-through taxation.

3.) Less Requirements

An LLC has fewer formal requirements than a corporation and it is fairly easy to maintain.

4.) Exclusive Business Name

After you register your LLC, no other business in your state can use your LLC name. This is an advantage for protecting your brand.

LLC vs Other Business Structures

Two of the most common alternatives to an LLC are a corporation and a sole proprietorship.

Compared to an LLC, a corporation is more formal, involves more bureaucracy, contains persistent paperwork, and stricter reporting. Instead of members, there are shareholders. In order to raise money, stock is used. A corporation also contains a board of directors so you would need to elect one.

In a sole proprietorship, the owner has complete control over the business and the perks from pass-through taxation. However, one of the biggest drawbacks is unlimited personal liability. With unlimited personal liability, the owner is solely liable for all business debts.

LLC Management Responsibilities

In general, an LLC has less management responsibilities compared to a corporation. However, most LLCs legally have to create an operating agreement which specifies how the company’s members, managers, and officers conduct business and states who is responsible for doing what. Most states also require an LLC to file a report every year or so which updates any current business locations, any current activities in the state, and any changes in their current members and managers. Like most legal documents there will usually be a fee associated with this report submission.

LLC Taxes

Depending on which type of LLC you own, an LLC will be taxed differently.

For single-member LLCs, the IRS views the business as a sole proprietorship which means the LLC itself does not need to file a tax return with the IRS. However, the sole owner/member must report all profits and losses when filing personal taxes.

For a multi-owner LLCs, the IRS views it as a partnership. The co-owned LLC itself does not pay income taxes. Instead, each of the owners will pay taxes on their share of the profits on their own income tax returns. Each member’s share of the profits and losses is called a distributive share. The IRS will expect you to report it each year, even if your LLC has not distributed the shares yet. The multi-owner LLC also must file a Form 1065. This form states the members’ shares and the IRS reviews it to make sure the LLC members are reporting their personal income correctly.

Single-member and multi-member LLCs can also elect to be tax as a corporation, which could reduce the amount your LLC is taxed.

Starting an LLC

The process for starting an LLC varies state by state, but it is still fairly easy. Here are the general steps:

  1. Ensure that your current business name is not being used by any other business in your state. If you do not know, your state will let you know. You will be required to add “LLC” or “Limited Liability Company” to your business name.
  1. File the Articles of Organization which identifies your business name, address, and other entity information. Most states may already have a form that is easy to fill out. You can find New York’s on the Department of State website.
  1. Name a Registered Agent that will represent your LLC. You can assign a third-party business or self-proclaim to receive any legal documents.
  1. Pay the required fees. In New York, filing fees are $275. New York also has an annual filing fee which ranges from $25 to $4500. The amount depends on your LLC’s gross income sourced from New York in the year before.
  1. Some states require a notice of intent to create an LLC. The simplest way is publishing a notice in a local newspaper that announces your intent. In New York all LLCs must publish notices in two local newspapers for six consecutive weeks within 120 days of formation. Once publication is done, the LLC has to obtain an Affidavit of Publication and submit it with a Certificate of Publication form to the New York Division of Corporations .
  1. Make an LLC operating agreement. This is required by most states and helps avoid any future issues among members of an LLC.

If you need help setting up an LLC, please contact the Law Office of Inna Fershteyn at (718) 333-2394 for all of your estate planning needs.