LLC is short for Limited Liability Company. It’s a type of legal business entity that provides business owners with a lower level of liability. According to the IRS, LLC owners face significantly lower risks from company actions and debts. In general, this means that if the company has unpaid debts, creditors can only go after the assets of the company. They cannot go after the personal assets of the company owners.
Every state has a slightly different definition of what constitutes an LLC. In general, all LLCs must be created by individuals or corporations who are legally capable of forming a business structure. Understanding the basics can help you to decide whether you want to form an LLC for your business.
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What Are the Types of LLC?
LLCs come in a variety of forms, including partnerships and corporations. The IRS taxes each form differently. If more than one person is involved in the creation of the company, the IRS presumes the company is a partnership LLC. However, the owners can choose to be taxed as a corporation, instead of a partnership, by filing Form 8832. If only one person forms an LLC, the IRS considers the company to be a separate entity from that individual. For tax purposes, you will have to file taxes as a corporation, a sole proprietorship or a partnership, depending on the kind of LLC you choose.
How Does an LLC Compare to Other Business Entities?
LLCs offer the same protections as S and C corporations. A Limited Liability Company (LLC) is a hybrid business structure. It combines elements of a sole proprietorship or partnership with those of a corporation. Owners of sole proprietorships and partnerships remain fully liable for the debts and obligations of their businesses. Those who own corporations are not personally responsible for business debts.
However, setting up and running a corporation can involve additional expenses and requirements. Many small business owners aren’t interested in the additional hassle. They just want protection from personal liability for business debts. For these business owners, a Limited Liability Company can be an excellent alternative.
The primary benefit of a Limited Liability Company (LLC) business structure is that the owner(s) enjoy the same personal protection from responsibility for business debts as owners of corporations. Forming a Limited Liability Company is not really any more difficult than setting up a sole proprietorship or partnership, yet provides owners with the same level of protection as a corporate business structure.
The three major tax benefits to creating your LLC are:
1. Flexibility in how your LLC is taxed
LLCs can elect how they are taxed. This is probably one of the best—but least understood—advantages of forming a LLC. You can decide whether it’s better to file your taxes as a “disregarded entity” or to get corporate treatment. The IRS treats a disregarded entity the same as it does a sole proprietor. It treats the company’s income like personal income.
On the other hand, if you choose corporate taxation, the IRS will tax your business at a flat corporate tax rate 21% starting January 1, 2018. Any LLC can choose this tax treatment by filing IRS form 8832. Both of these approaches can have big advantages, depending on how much income you personally want to take and how much you plan to reinvest in your business.
2. Larger contribution limits
Your LLC allows you to set up both retirement funds and life insurance policies with greater contribution limits so you can set aside money for your future and your family.
3. Leasing assets
Your LLC also allows you to lease your personal assets to your corporation. For example, if you use a home office, the LLC could lease the office from you. By doing so, you are able to create a business expense the LLC could write off, while adding more income to your family’s bottom line. Keep in mind that these expenses must be legitimate business expenses. You will need to have a formal lease agreement in place.
No matter how you run your business, don’t forget that you can deduct business expenses. This includes deducting the cost of forming your LLC — so make it a practice to hang on to all your receipts.
