An LLC is formed by filing Articles of Incorporation with the Secretary of State. An LLC should also draft an operating agreement that will structure the business's finances and organization.
Forming an LLC requires less registration paperwork and smaller startup costs than forming an S-Corporation.
An LLC does have a limited life. When a member leaves the LLC, the business is dissolved. The remaining members can start a new LLC, if they choose. Provisions can be added to the operating agreement allowing the LLC business to remain viable upon the departure of a member.
Question: Who owns and manages it?
The owners of the LLC are called "members." Members may manage the company themselves or hire a manager. Members may also distribute profits as they see fit.
Question: What are the liability implications?
Members are protected from personal liability for the decisions and actions of the business. This does not protect members from "wrongful acts" of the LLC or its employees.
Question: What are the tax consequences?
Depending upon elections made by the LLC, the IRS will treat the business as a Sole Proprietorship, a Partnership, or a Corporation.
Generally, the LLC business is not taxed by the federal government. Rather, all profits and losses are "passed through" the LLC to each individual member. The members report those profits and losses on their personal federal tax returns. Members must also pay the self-employment tax contributions towards Medicare and Social Security.
An LLC with only one member will file a Form 1040 Schedule C. This is the same form used by Sole Proprietors.
An LLC with more than one member will file a Form 1065. This is the same form used for partnership tax returns.
An LLC also has the option of being classified as a Corporation for federal tax purposes by filing a Form 8832.
An LLC filing as a Corporation will use Form 1120 when filing taxes. This is the Corporation income tax return.
Question: What if I need help with choosing or setting up my business entity?
If you need help with choosing an entity type for your new business, drafting or filing Articles of Incorporation or Articles of Organization, or other legal documents necessary for your new business, please contact Deborah Hardin at The Hardin Law Firm, PLC or a licensed attorney in your state.
We serve Little Rock, North Little Rock, Sherwood, Jacksonville, Cabot and surrounding areas in Central Arkansas.
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