What exactly is a LLC and why should I form one
Updated: Feb 3, 2022
The main question a business owner, or someone who is starting a business will ask me is about the structure of the business. Sole Proprietor LLC or C Corp. In many cases an LLC is the best way to go. In case you do not know what a LLC is, here it is:
A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorships
What are the benefits of an LLC? While there are many benefits, the biggest benefit of an LLC is that it protects its owners' personal assets should the business face any legal issues. If your business is structured as an LLC, your assets are protected from any judgments that are imposed on the business. If your business cannot afford to pay the judgment, you, as a business owner, will not be forced to pay the money from your personal finances.
Another decision when forming your LLC is how you will be taxed. The federal government references LLCs as a "disregarded entity." When you choose this structure, you are taxed by the IRS as a sole proprietorship (if you are a single-member LLC), a partnership (if you have more than one member) or a corporation (either as an S corporation or a C corporation if that's what you elect). Once this selection is made, the business calculates taxes based on those tax rules for the IRS and then prepares an LLC return for the state in which they do business. The benefit of this is that LLCs are not subject to separate federal taxes, unless the LLC is a C-corp, because the LLC's profits and losses are passed on to each owner, who then submits that info with their personal income tax return. This flow-through" structure avoids the double taxation that corporations experience, where the business pays taxes on profits, which are then taxed again when the business owner pays personal income tax on them. However, business owners must pay self-employment taxes, and they may also find themselves in a higher tax bracket. In such instances, they may be able to save money by electing to be taxed as an S-corp.