An LLC is a limited liability company. An LLC protects the personal assets of the business owner in the event of legal action being taken against it. LLCs combine the tax benefits of partnerships with the limited protection afforded by C-corporations. The state fees required to register an LLC in Kentucky vary from $40 to $520 in Massachusetts.
It is a smart idea to register your business as a legal entity (e.g. an LLC) before you start any business. This will help protect your personal assets in the event of a lawsuit against the business. Online legal services can help you register your LLC. InFile allows you to quickly register your company as an LLC. IncFile allows you to start your business immediately for as low as $0 and includes no state fees. There are no contracts.
- 1 How an LLC works
- 2 Who is an LLC Right for?
- 3 LLC Tax Obligations
- 4 How to Start a LLC
- 5 The pros and cons of forming an LLC
- 6 Providers of LLC Registration
- 7 Frequently Asked Questions (FAQs) About an LLC
- 8 Bottom line
How an LLC works
Although there are many reasons to create an LLC, the main purpose is to protect the owners of the business in the event that they have to file a financial or legal matter. This protection is not provided by other legal entities such as a sole proprietorship (an entity owned by one person) or a partnership (a business owned and controlled by multiple people). If someone files a lawsuit against you and your business is found to be at fault, your personal savings would not be protected if your sole proprietorship was operating.
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Limited liability companies offer tax benefits for many business owners. LLCs do not have to be taxed at the 35% rate as C corporation (Ccorps). These entities are legal entities that can be used by larger companies that are managed or are considering being listed on stock exchange. Profits from an LLC are subject to tax at the personal level. This includes self-employment tax, federal tax and state tax.
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To get tax savings, your LLC can be taxed as an S-corp (S-corp). You can elect to have a portion of your profit paid out as a dividend, which will save you thousands of dollars.
An online legal service like InFile can be used to register your LLC. It costs $49 plus the state fee. Online legal services can expedite the process and handle all paperwork. The state usually takes around a month to approve the paperwork. You can also register your company by going directly to the state’s official website for business registration and following the steps.
There are some requirements that must be met before you can legally establish an LLC. While not all states have the exact same requirements, most states require that you use a unique business name. Also, you must list a registered agent (business contact), complete articles of organization (legal document establishing your business), and pay the fee.
Who is an LLC Right for?
An LLC is an excellent option for business owners who want flexibility in the ownership of their business. An LLC can be owned only by one member, or by multiple members. If you are not a U.S citizen or are a partner with another non-American citizen, you can still create an LLC.
These are some businesses that an LLC might be suitable for:
- One-owner business: To start an LLC, one member is required, which is the owner of the business.
- Multi-owner company: If you are starting a partnership you can add multiple members to your limited liability business.
- A foreign national business owner: An individual who is not a citizen of the United States can create an LLC. There are no restrictions on residency or citizenship.
- A business with passive owners: An LLC can have several passive owners. This is a Manager-Managed LLC.
- Anonymously owned business: The ownership details of an anonymously owned business are kept private. Only businesses that are registered in New Mexico can have an anonymously owned business.
Even though there are many options, most businesses are founded as single-member LLCs. It’s best to consult a business attorney if you are considering creating an LLC with more members than one. A multi-member LLC should create a detailed partnership agreement that outlines what happens to the business in the event of one member leaving or becoming disabled.
LLC Tax Obligations
An LLC must pay a self-employment tax of 15.3% by law. Federal and state taxes are applicable to the rest of the profit. The business owner receives the remaining profit. S-corp status is a popular choice for limited liability companies to reduce their taxes by thousands of dollars. The S-corp status allows a business to split its profits between the owner’s salary, and a dividend. The industry’s fair market rate must be used to determine the owner’s salary.
Let’s take, for example, a company that makes $80,000 per year. As a general manager, you receive $50,000. You get $30,000 ($80,000-50,000) as a dividend that is exempt from tax. Your $50,000 salary will be subject to tax at the self-employment and federal levels, as well as at the state and local (if applicable). The $30,000 salary would be exempted from taxes by paying $4,590 ($80,000 x 15.3% = $12,240; $30,000x 15.3% = $7650; $12240 – $7650 = $4,590).
How to Start a LLC
Although it is easy to start an LLC, there are some things you need to keep in mind. You can follow the steps of most states on a state-designated website. An online legal service like InFile takes you through this process step-by-step and then submits it for you.
To start an LLC, you need to ensure that the name of the LLC is not already taken in the state where it is being registered. The state will reject your request if you attempt to register the LLC with a name already taken. States keep a list of all current business names. This database can be searched to verify that your name hasn’t been taken before you submit the paperwork.
A majority of LLCs require that a registered agent be named. This is the official contact for your business. The state will communicate with this contact regarding any LLC-related matters. Name someone who is responsible for the LLC. If the LLC fails to file its annual LLC renewal with the state, the company could be charged a fee of several hundred dollars.
The articles of organization, which is a document that outlines the basics of your business, is also required for the establishment an LLC. States have different requirements. However, most states require that the articles of organization include the business name, registered agents, address of principal business location, duration, contact information and the purpose.
The pros and cons of forming an LLC
The LLC is the most common business structure but it has its drawbacks. The self-employment tax and the possibility of an LLC being closed if one member leaves are two examples of disadvantages to the LLC. These drawbacks can vary depending on what type of business you have and how many owners you have. The LLC is attractive because of its many advantages, including the lack of ownership restrictions, minimal paperwork, and low annual fees.
The pros of the LLC
These are the benefits of the LLC business structure.
- Personal liability is limited: Creating an LLC will separate the owner’s personal and business liability. If the business is insolvent or sued, the owner’s personal financial security is not at risk.
- Pass-through Taxation: An LLC, as a business entity, does not have to pay taxes. Profit is passed to members of the LLC and is taxed as personal income. This could result in less taxes being paid than the 35% Ccorp tax.
- The LLC does not need to hold an annual meeting or adopt bylaws. An LLC’s annual filing is all that is required.
- There are no ownership restrictions for This makes the limited liability company attractive to many business owners. It is acceptable for a company to have multiple owners.
- There are many tax options available: An LLC’s default taxation is the same as a sole proprietorship, partnership or corporation. Depending on income and business type, an LLC may elect to be taxed either as an S-corporation or C-corp. This could help save you money.
An LLC is treated as a partnership or S-corp. This is called pass-through taxation. An LLC’s members are taxed at their own tax rates, rather than being subject to double taxation from a corporation. The company is first taxed at a corporate tax rate and then the shareholders are taxed on their holdings. An LLC may have to pay almost $1,000 in yearly taxes in some states. For more information, consult your attorney.
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Cons of the LLC
Here are some cons to the LLC business structure.
- Self-employment taxes An LLC’s default taxation includes self-employment, federal tax Medicare and Social Security on all profits. This is why it’s important to consult an accountant or business lawyer.
- LLC Termination: In general, if one of the members decides to quit the LLC and the business, the LLC will be terminated. In a C-corp, members are allowed to leave and come back freely, business entity termination is not possible.
- Additional administrative work required: In order to avoid personal financial liability, the owner must keep separate his personal and business finances (incomes and expenses). The business owner must open a checking account for their business.
Providers of LLC Registration
There are many options available for registering your LLC business. Online legal services like Infile, LawZoom and Rocket Attorney charge a fee to assist you with the paperwork and navigate the state’s business registration website. You don’t need to use an online lawyer service. The LLC can be registered on your state’s website.
There are many ways to register an LLC.
IncFile is an online legal services that charges the lowest LLC registration fees. IncFile charges $49 to register your LLC. You can also get an operating agreement, registered agent and employment identification number from IncFile.
LegalZoom is another excellent option for filing LLC paperwork. The fees for registering a limited liability company start from $69 and can be completed in a month. It also costs $349 to complete the LLC registration in 10 days.
Rocket Lawyer is another online service provider. Rocket Lawyer’s monthly subscription includes a free LLC registration and state fees. Membership fees are $39.99 per month. This includes unlimited legal document downloading, unlimited 30-minute consultations with an attorney on new cases, and no legal questions.
You can also register your LLC yourself. To begin the process, visit your state’s official website for business registration.
Frequently Asked Questions (FAQs) About an LLC
This section answers the most common questions regarding an LLC.
What is an LLC? How does it work?
LLC stands for limited liability company. An LLC is a legal entity for business that protects the owner’s personal assets in case of a lawsuit or bankruptcy. The LLC is a legal entity that business owners prefer because it offers the tax benefits of a partnership or sole proprietorship, but also provides legal protection like a corporation.
It costs $150 to register an LLC business. However, state fees can vary from $40 in Kentucky to $520 for Massachusetts. An official state website can be used to register a business as an LLC. Or, you can use an online legal service website such IncFile. IncFile charges a fee to arrange the LLC paperwork for you and submit it.
What are the advantages of an LLC?
An LLC is a better business structure than another. There are many benefits to an LLC over other business structures, including limited personal liability, pass through taxation, minimal paperwork each year, ownership restrictions, and a variety of taxation options (such being taxed either as an S-corporation or C-corp).
What are the downsides of an LLC?
A limited liability company has some disadvantages that you should be aware of. There are some disadvantages to limited liability companies, such as having to pay 15.3% self-employment taxes, LLC termination process for members who leave, and having to seperate personal and business finances (income, expenses) in order to avoid personal financial liability.
What’s the purpose of an LLC
An LLC’s main purpose is to protect the owner’s finances from business liabilities. The partnership and sole proprietorship business structures do not provide financial protection. The LLC owner is protected if the business is sued. The LLC also allows for a simplified ownership structure within the company. C corporations typically have shareholders, directors and officers. This can make things more complicated. An LLC has only members.
How can LLC owners be paid?
The compensation for LLC owners is the same as that of sole proprietorship or partnership owners. For self-employment, federal taxes and state taxes, a percentage of the profit is deducted. After taxes have been deducted, the business owner receives the remaining profit. Many business owners choose to have their LLC treated as an S-corp. This is another type business entity. An S-corp is able to be taxed on a portion of the profits the business makes. This can often result in tax savings of thousands of dollars.
A majority of small-business owners will choose an LLC as their legal business entity. It is attractive because it allows you to keep your personal finances separate from your business liabilities. The flexibility in taxation options available, such as the option to elect the LLC as an S-corp tax, can help business owners save thousands of dollars in taxes. An average cost for registering an LLC in a state is $150.