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Selecting The Right Business Structure (Part 4) – LLC

A limited liability company, or LLC, is a hybrid structure that blends the ease, flexibility, and tax benefits of a partnership with the liability protection of a corporation. About 2.4 million U.S. businesses are registered as LLCs, and this business structure is growing faster than any other business type, according to the IRS. An LLC can have one or several “members,”, members can be individuals or other businesses, and there is no restriction on the number of members an LLC can have.  Review the advantages and disadvantages below to help you decide whether an LLC is right for your business.

ADVANTAGES

Choosing to register your business as an LLC offers numerous advantages:

  • Limited Liability

Members are not individually or directly liable for dealings of the business. This means that the personal assets of each member are protected from the business’ creditors. This protection applies as long as business and personal financials are kept separate.

  • Pass-Through Federal Tax

By default, an LLC is a pass-through entity. This means that its profits go directly to its members and are reported on the members’ personal tax returns. This avoids double taxation.

  • Flexible Management Structure

An LLC can decide to be managed by its members to allow all owners to be involved in the business’s day-to-day decision-making. Alternatively, it can be managed by managers (who can be members or new hires). This is helpful in instances when members are not well versed in running a particular type of business and want to hire people who are. In many states, an LLC is considered member-managed by default unless explicitly stated otherwise.

  • Simple Startup

Initial paperwork and fees to establish an LLC are generally inexpensive, however, there is variation in fees and taxes from state to state.

DISADVANTAGES

Before registering your company as an LLC, contemplate these potential drawbacks:

  • Limited Liability Controls

In a court proceeding, a judge can “piece the corporate veil” and find that your LLC does not protect your personal assets. This is typical when you fail to separate business and personal transactions, or if you have committed fraud while operating the business which caused losses for others.

  • Self-Employment Tax

By default, the IRS treats LLCs the same as partnerships for tax purposes, unless the business has chosen to be taxed as an S Corporation. When an LLC is taxed as a partnership, the government deems members who work for the company to be self-employed and those members must pay Social Security and Medicare taxes (aka “self-employment taxes”) based on the business’ total net earnings. However, if your LLC chooses to be taxed as an S Corporation, members pay Social Security and Medicare taxes only on their actual compensation, not total net business earnings.

  • Managing Member Attrition

If a member dissociates from the company, goes bankrupt or dies, the LLC must be dissolved, and the remaining members are responsible for all legal and financial obligations. These members can still run the business, but they will have to start a new LLC.

FORMING YOUR LLC

  • Choose a name: Register a unique name. You search potential names on the Florida Division of Corporations website.
  • Choose a registered agent: A registered agent is the person you appoint to receive all correspondence for the LLC. States generally require a registered agent’s name and address when filing articles of organization.
  • File Articles of Organization: Article of Organization require details like name, principal place of business and management type.
  • Get an Employer Identification Number: The IRS requires businesses that have employees or operate as a corporation or partnership to have an EIN. This is a nine-digit number assigned to the business for tax purposes.
  • Draft an Operating Agreement: Your operating agreement should include information about your management structure, ownership, voting rights, authority and duties of members, managers, and high-level employees as well as details on how profits and losses will be distributed. Many states do not require an operating agreement at registration, but we highly recommend taking the time to create one.
  • Open a Business Checking Account: Having a separate checking account draws a clear line between business and personal financials.
  • Foreign LLCs in Florida: LLCs formed outside of Florida are required to register with the Florida Secretary of State. Foreign LLCs also must appoint a registered agent who is physically located in Florida.

If you are ready to form an LLC in Florida or want to talk to one of our knowledgeable attorney about you options, contact Capital Partners Law today.

What Should You Do Next?

If you are interested in learning more or speaking with an attorney at Capital Partners Law, there are plenty of ways to get in touch:

This article is for informational purposes only. It does not create an attorney-client relationship with any reader nor should it be construed as legal advice. If you need legal advice, please contact our firm.