Choosing the right business structure would be a very good point to start planning for the business’ future. This would pretty much dictate the flow of your business, from credits, assets and more. If you are looking for a flexible and less tedious form, an LLC structure is what you might be desiring for. We will discuss here all the things you might need to know about an LLC. We will be answering WHAT, HOW, WHY, PROS & CONS of Disregarded LLCs. So, Let’s begin!
WHAT IS A LLC?
An LLC stands for limited liability corporation. This is a business form that combines pass-through taxation (like in a partnership or sole proprietorship) with the limited liability of a corporation. If a corporation and a sole proprietorship or even partnership had a baby, they’d name it LLC. It’s flexibility and fewer paper works are the main reasons why this business form is booming.
HOW TO START AN LLC?
By knowing what an LLC is, maybe you would want to know how to start one, right? So here it goes, steps on how to start an LLC. Every state has a different requirement to follow so kindly check your state’s policies.
Step 1: Choosing a Name for Your LLC
In this step, think of a good and catchy name that your business will bear for a long time. Most states won’t allow the same name of an entity so you better choose a unique one.
Step 2: Choosing a Registered Agent
A registered agent is a person who agrees to receive lawsuits, subpoenas and other official documents on behalf of the LLC and to pass them along to the appropriate person at the LLC. There are also companies that offer a registered agent for a certain fee.
Step 3: Prepare an LLC Operating Agreement
This serves as the blueprint of the LLC, laws and regulations, rights and responsibilities of each LLC member. This will also minimize future problems & disagreements.
Step 4: File Organizational Paperwork With the State
Each state has its own form and procedure for establishing an LLC. In general, you must file:
- The name and address of the LLC
- The length of its existence, if not perpetual
- The name and address of the registered agent
- The purpose for which the LLC was formed
The paperwork usually must be signed by the person forming the LLC, and in some states, the registered agent must also sign.
Step 5: Obtain a Certificate from the State
After the LLC’s formation documents are filed and approved, the state will certify your LLC. Upon receiving the certificate, you can start with business matters like getting a tax ID number and business licenses and setting up a business bank account.
WHY CHOOSE AN LLC?
LLC is chosen by many due to its flexibility, by this, we mean, once you have set it up, there’s not a need for a lot of maintenance and, perhaps more importantly, it’s easy to add new partners or sell an interest in the entity to someone else. It can also be easily registered, tends to be adequate for businesses that are more in their beginning stages because it can also protect your assets better than other forms.
PROS OF A DISREGARDED LLC
Simpler tax filing
The tax filing will be simpler since pass-through taxation will be applicable here. Only the business owner is taxed, not the business, which means you have to file only one tax return, saving you the time and expense of filing a separate return for your LLC.
The status of disregarded LLC only applies at the federal level, not the state level, where it remains an individual entity. This means that assets owned by the LLC are protected from any claims a creditor may have on the property of the LLC’s owner.
CONS OF A DISREGARDED LLC
Employment and excise taxes.
Being a disregarded entity is recognized only for the purposes of federal taxes, meaning the LLC may still be responsible for employment and excise taxes. However, this is relevant only if you have employees other than yourself or if your LLC has any excise tax liability. While you use either your Social Security number or EIN when filing your LLC’s federal taxes, if your LLC has liability for either excise or employment tax, you must use an EIN to report and pay such taxes.
In addition to your income taxes, the amount you pay is deductible, up to a maximum cap. As a disregarded LLC, this does not release the owner of a single-member LLC from the responsibility of self-employment taxes.
We hopefully enlightened you on the things you need to know about an LLC.