How to Change Your Sole Proprietorship to LLC?

So, you’ve finally realized that it’s time to turn your side hobby into a legal business entity?

Or perhaps, you’ve realized that your personal assets are at high risk with Sole Proprietorship?

Maybe a new client only wants to deal with a business entity like an LLC?

Well, there can be several reasons for you to formalize your business by converting into an LLC. After all, a Sole Proprietorship is not a business entity. It is just you operating your business yourself.

But guess what, technically there is no way of converting a Sole Proprietorship into an LLC.

Does that mean someone operating as a Sole Proprietorship cannot change it to an LLC?

Well, the only solution is first to stop using your Sole Proprietorship and then form an entirely new LLC. In other words, changing your Sole Proprietorship into an LLC is almost similar to starting an entirely new business.

Fortunately, the whole process is not as complex or expensive as you’d imagine. On top of it, the way you operate your business won’t quite change much. As an LLC, you’ll also have a layer of protection for your personal assets.

Unlike Sole Proprietorship where the business owner and the business are a single entity, LLC puts the much-needed separation between the two. Even when it comes to taxation, you’ll have increased flexibility as an LLC. The conversion can also help change your business perception, encouraging you to grow it further.

So, let us now have a detailed look at what you need to do to change your Sole Proprietorship to an LLC. 

Start with the Business Name

Irrespective of whether you’ve been running your Sole Proprietorship under your name or DBA/Fictitious Name, you’ll need a new name for your LLC. This is because it is very much possible that the name under which you’re running your Sole Proprietorship might already be registered as an LLC in your state.

The best way to check for business name availability is to refer our 50-State Business Entity search guide.

Alternatively, get in touch with the state secretary’s office to know whether or not the name you have for your LLC is already registered. Most of the states now have online databases of registered names. After finalizing a name that is not used by any other business in your state, make sure that the name does not infringe anyone’s trademark.

Check the patent and trademark office’s database online to search for trademarks with the same name. Your new business should have “Limited Liability Company” in the name. There are also abbreviations like “Liability Co”, “Ltd”, and “LLC” that you can use. You can also consult a legal professional to finalize the name. 

In most states, you’re not required to reserve your LLC name beforehand. The registration is done automatically when the paperwork for forming LLC is filed. However, the rules differ in a few states.

Filing Articles of Organization

The articles of organization are the documents that outline the initial statements needed to form an LLC. You have to fill out the forms and submit the same to the filing office of your state. The requirements for filing vary between states.

It is just a simple document which outlines the basic details of your business, like the name of the LLC, name of the owner/s, address, etc. There is a fee for submitting this document.

Moreover, in most of the states, you’ll also need a “registered agent” for receiving legal documents. In case of a single-member LLC, you’ll be that registered agent. For multi-member LLCs, the owners need to select one owner as the registered agent.

Writing the Operating Agreement of Your LLC

It is through the operating agreement that the operations and ownership rules are defined. In other words, it maps out your entire business process. It has details like the responsibilities and rights of the owner/s, sharing of profits and losses, and voting power.

LLCs are not required to submit their operating agreement to any legal organization or the government. However, it is highly recommended that multi-member LLCs create the operating agreement as it reduces the chances of conflicts between LLC owners. 

Applying for a Bank Account for Your LLC and Announcing the LLC

With LLC, you have a business entity separate from the owner. This separate business entity has the right to open bank accounts and purchase properties. While it was not compulsory to have a separate business account when you were running a Sole Proprietorship, you’ll need one for an LLC.

The bank account for your LLC makes it easier for you to keep your personal funds separated from the business funds. It also enables you to keep your personal assets protected, report taxes, and keep records.

Some of the states also require you to announce your LLC. This is done by publishing the announcement in any local newspaper. In some states, you also need to send written proof of the same to the filing office. 

Applying for Business Permits and Licenses

Once all of this is done, it’s time for you to register for business permits and licenses. Depending on the type of business you want to run, there can be many different permits and licenses that you might require in different states. Check with the LLC filing office to know more about the permits and licenses that apply to your business.

Apart from this, you’ll also need to either transfer your EIN (Employer Identification Number) from Sole Proprietorship to LLC or apply for a new EIN. The transfer of EIN from Sole Proprietorship to LLC is only possible if you are a single-member LLC and meet the following requirements-

• You want the LLC to be taxed as a Sole Proprietorship/Disregarded Entity
• You don’t want the LLC to be taxed as a C-Corp or S-Corp
• There are no employees in your LLC
• Your LLC is not liable for excise tax or employee tax

If you do meet these requirements, you can send a request letter to the IRS for transferring your EIN from Sole Proprietorship to LLC. In all the other cases, you’ll need a new EIN.

Conclusion

Moving from Sole Proprietorship to LLC can help you get a host of benefits with the biggest being the separation it puts between you and your business. The whole process is simple and inexpensive, making it an excellent choice for any Sole Proprietorship owner serious about his/her business and personal asset protection.

If all of this seems complicated, you can also hire legal help to get you through the process. If everything moves in order, it should not take more than 15-20 business days to change your Sole Proprietorship into an LLC.

The post How to Change Your Sole Proprietorship to LLC? appeared first on .

source https://businessentity.org/learning-center/sole-proprietorship-to-llc/

Foreign LLC Vs Domestic LLC – What’s the Difference

LLC or Limited Liability Company is an excellent option for small businesses. Personal asset protection, operating flexibility, and tax benefits are some of the reasons why enterprises prefer the LLC structure.

To start an LLC, you’re first required to register it in your state. But what if you want to do business in multiple states? Do you need to register your LLC in all the states where you conduct business?

This is where foreign LLC and domestic LLC get into the picture. If you’re planning to start an LLC, it is essential for you to understand the difference between the two.

What is a Foreign LLC?

The term “foreign LLC” looks like something that applies to an LLC that conducts business internationally (Wrong!).

However, this is not the case. A foreign LLC is an LLC that operates in or wishes to operate in a state that is different from the state where it was formed.

In other words, the primary business location of the LLC is not in the state where it was formed. For instance, let us assume that you’ve created an LLC in Texas, and want to expand it to California as well. So, you’ll be required to register your Texas LLC as a foreign LLC in California.

The term “foreign” here means that your LLC is foreign to California.

What is a Domestic LLC?

A domestic LLC is the exact opposite of a foreign LLC. A domestic LLC is the one that is formed and conducts business in the same state. Even if you want to do business in other states, your LLC would still be considered as a domestic LLC in your home state but foreign LLC in other states.

For instance, you form an LLC in Texas and operate in Texas. If we take the same example discussed above, then your LLC in Texas is a domestic LLC while the LLC in California is a foreign LLC.

In other words, when you register your LLC in the first state, you register it as a domestic LLC. In all the succeeding states, you’ll register your LLC as a foreign LLC.

Note that you’re required to register your LLC as a foreign LLC in every state where you want to transact your business. If you do not register in every state, you will be liable to pay penalties and fines to those states.

Now that the definition of foreign LLC and domestic LLC is clear, let us now have a look at when an LLC should register as a foreign LLC.

When to Register as Foreign LLC?

You’re required to register your LLC as foreign LLC if you’re planning to do business in a state that is different from the one where your LLC is first registered. Your LLC is considered to be doing business in another state if-

• You want to sell in a different state through a representative of the manufacturer, agent or distributor
• You want to have a manufacturing unit, distribution facility, retail store or office in another state
• You want to have a business bank account in another state
• You’re planning to purchase personal property or real estate in another state
• You want to hold business meetings or transact business in another state

As you can see, it is not only necessary to register your LLC as foreign LLC in another state only when you’re conducting business in that state. Something as simple as holding a business meeting or even having a business bank account is considered as “doing business” and requires you to register as foreign LLC.

Registration Exemption

It is also important to know that not all of your business activities in a different state require you to register your LLC as a foreign LLC. The rules vary between states. For instance, in New Mexico, one-off transactions do not require you to register your LLC as foreign LLC in the state.

You can get in touch with the Secretary of State’s office or visit their website to know more. Alternatively, you can also consult a local attorney to know more about the rules and regulations of that state.

Fee for LLC Registration

Irrespective of whether you’re registering a domestic LLC or foreign LLC, you’re required to pay the registration fee. However, in most of the states, the fee for registering a domestic LLC is lower than registering a foreign LLC. Also, in some of the states, you’re required to re-register your LLC every year and pay the applicable fee for the same.

Ready to Register Your LLC?

So, if this is the first time you’re registering your LLC, you’ll register it as a domestic LLC. If you already have a domestic LLC and want to do business in any other state, you need to register your LLC as foreign LLC in that state.

Now that you’ve understood the difference between the two, you’re now one step closer to forming your LLC and taking your business to the next level.

The post Foreign LLC Vs Domestic LLC – What’s the Difference appeared first on .

source https://businessentity.org/learning-center/foreign-llc-vs-domestic-llc/

What Are Articles of Organization?

If you’re planning to form an LLC, you might have surely heard about Articles of Organization.

It is only after filing this document that your LLC gets legally registered in your state.

But what are Articles of Organization?

• What all does it include?
• Who files it?
• How to file it?

Find answers to all of these questions below-

What Are Articles of Organization?

In most of the US states, you’re required to file a document known as “Articles of Organization” to register your LLC legally. In some of the states, this document is also known as “Certificate of Organization” or “Certificate of Formation“.

It is the Articles of Organization that establishes the power, rights, liabilities, duties, and other important obligations of LLC members. This document also establishes the obligations between LLC members.

The Articles of Organization is generally filed with the State Secretary’s office of the state in which the LLC is to be registered. However, in a few states like Arizona, New Jersey, and Florida, the document needs to be filed with other state government agencies.

What All Does the Articles of Organization Include?

The details you’re required to provide in Articles of Organization varies between states. However, most common information that you need to furnish is-

• Name of the company
• Duration for which the LLC will be operational
• Statement of purpose
• Registered Agent
• Place of business
• Management
• Information about the members, officers, and managers of the LLC

Once you file the Articles of Organization, the state office will review the document and might also reject it. Majority of the rejections are due to the proposed name of the LLC.

It is only after the state office approves this document that your LLC becomes a legal business entity in your state.

Filing Articles of Organization

Thanks to the internet, filing Articles of Organization is now easy and quick. Follow the steps mentioned below for filing the document-

1. Visit the State Secretary’s Website

To start the filing process, visit the State Secretary’s website (refer this page) of the state where you want to register your LLC. Most state websites now have a format of Articles of Organization as well as details about the things you’ll need for filing.

There is also a fee for filing the document. You can find the information regarding the same on the website, and you can also find the printable PDF form or a form that you can fill and submit online.

2. Collect the Required Information

Before you start filling the form, collect the information that you’ll be asked to provide. While the information required for filing varies between states, you’ll at least need the details mentioned above.

It is better first to collect all the information you’ll need before you start filling the form. This will make the filing process quick and will also reduce the possibility of errors.

3. Fill and Submit

Once you have the required information, you can start filling the form online or print the form and start filling it. Some states need you to submit the form online where others require you to mail the document to the State Secretary’s or other state government’s office.

If you’re submitting it online, you’ll also need your credit card details to pay the filing fee. If you’re required to mail the document, mail it along with the check of the filing fee.

Once the form is submitted or mailed, the state office will review it and send you a response within a few weeks. However, there is also an expedited option in some states.

Tips for Filing Articles of Organization

Use these tips when filing your LLC’s Articles of Organization-

• Make sure that the name you’ve selected for your LLC is not registered by any other LLC in your state.
• You’re not required to register your LLC name separately as the Articles of Organization does that for you.
• If you’re mailing the Articles of Organization and sending a filing fee check, it is better to send a check of your business checking account if you have one. Having a business account adds more legitimacy to your business.
• A Registered Agent should be someone who has some experience in legal matters and can remain available throughout the working hours.
• When filling the form online, take its screenshot before submitting. In case of any errors, the snapshot will make it easier for you to re-fill the form.
• Some of the states also require you to publish your LLC’s Articles of Organization. Check the State Secretary’s website to know if this applies to your state.

Conclusion

The Articles of Organization is just like the birth certificate of your LLC. It is only after the document is filed and approved that your LLC receives a legal business status in your state. The Articles of Organization is known by a few different names in some states, and the information you’re required to submit can vary between states.

But keep the information mentioned above in mind, and you shouldn’t face any major inconvenience in the filing process.

The post What Are Articles of Organization? appeared first on .

source https://businessentity.org/learning-center/articles-of-organization-llc/

What is a Certificate of Organization?

All set to form a Limited Liability Company?

Have all the information regarding the documents you’ll need for forming an LLC, like the Articles of Organization and Operating Agreement?

What about the Certificate of Organization?

Some of the states in the US now require you to file a new document known as Certificate of Organization for forming an LLC. Also known as the Certificate of Formation, it contains a host of important details about the LLC.

If you’re planning to form an LLC, here are some of the most important things that you should know about the Certificate of Organization-

What is a Certificate of Organization?

The Certificate of Organization is a document needed for forming an LLC in some states like New Jersey, Iowa, Delaware, Texas, Pennsylvania, and Idaho.

In most of the states, you’re required to submit your LLC’s Articles of Organization to the Secretary of State’s office. After going through the documents and approving it, the state office then sends you the Certificate of Organization.

In some other states, you need to create the Certificate of Organization and file it with your Secretary of State’s office. The state office will then stamp and sign the certificate before sending it back to you.

What Information is Included in the Certificate of Organization?

The information included in the Certificate of Organization varies between states. However, most of the certificates do have these basic details like-

• Name of the LLC
• Date on which LLC was formed
• Registered Agent’s name and address (In case of single-member LLC, the single member is the Registered Agent and in multi-member LLCs, the members select one as a Registered Agent)
• Address of the LLC’s registered office
• Whether LLC management is handled by the members themselves or by hired managers
• Name and address of one or all the members

How to Submit Certificate of Organization?

As mentioned above, you’re either required to submit your LLC’s Articles of Organization to the state office and they’ll send you the Certificate of Organization or you need to create Certificate of Organization on your own and submit the same to the state office depending on the state where you’re registering the LLC.

If you want to create a Certificate of Organization, the State Secretary’s website generally has a fillable PDF form that you can use. After filling the certificate, you can submit it online and pay the filing fee.

However, in some of the states, you’re required to print the PDF form and then fill it manually before mailing it to the State Secretary’s office. After going through the certificate, the state office will then sign and stamp it before sending it back to you.

In case if you want to create Articles of Organization for your LLC, you can find several templates online that you can use. But if you want to create a multi-member LLC, it is better to consult an attorney for the same. Once the Articles of Organization is created, you can mail the same to the State Secretary’s office and they’ll send the Certificate of Organization after due verification.

Is the Certificate of Organization Similar to Articles of Organization?

Both, the Certificate of Organization and the Articles of Organization, do the same job of registering your LLC in a state. It is just that different states call it by different names and the information included in them can vary between states.

In some states, you’ll need the Articles of Organization and in some others, you’ll need a Certificate of Organization.

Moreover, states like Texas, Delaware, and New Jersey require ‘Certificate of Formation‘ which is another name for ‘Certificate of Organization‘.

Is the LLC Owner/Member Responsible for Filing Certificate of Organization?

It is not necessary for a particular person to file the Certification of Organization for your LLC. If you’re creating a single-member LLC, you can file it or you can hire a document filing company or attorney to do the needful.

Even in case of multi-member LLCs, any member of the LLC or a document filing company or attorney can file the certificate.

How Much Time Does It Take to File Certificate of Organization?

This again depends on the state in which you’re filing. Some states complete the filing process within 2-3 working days while in many other states, the process can be as long as several weeks. To make sure that there are no errors from your end, it is better to hire a document filing company or an attorney.

Conclusion

The Certificate of Organization is only required in a few states. If you’re planning to form an LLC, it is important to consult the State Secretary’s office to know whether or not you need the certificate in the state where you’re planning to register.

Even in states where the certificate is required, the whole process of creating and filing it is mostly easy. In case of any concerns, you can visit the State Secretary’s website or consult an attorney or document filing company.

The post What is a Certificate of Organization? appeared first on .

source https://businessentity.org/learning-center/what-is-a-certificate-of-organization/

What is an LLC? Is it Best suited for your Business?

You might already have a lot on your mind if you are planning to start a new company.

But two things that deserve special attention are reducing personal risk and saving taxes.

What if there was a considerably simple way of achieving these goals?

Creating an LLC is an excellent way to protect your personal assets and also experience tax benefits.

This versatile business structure keeps the corporate formalities and paperwork at a minimum while offering a host of benefits.

Irrespective of whether you are a sole owner or have other partners, you can experience many valuable benefits.

• So, what are these benefits?
• How is an LLC better than other popular business structures?
• What are the different types of LLCs?
• Is LLC the right choice for you?

Let us discuss all of these questions to help you make the right decision.

What is an LLC?

An LLC or a Limited Liability Company is one of the most popular business structures. It combines the features and benefits of Sole Proprietorship or Partnership with those of a Corporation.

An LLC can have a single owner or multiple owners. The owners are members of the LLC.

• An LLC with a sole owner is single-member LLC (SMLLC).
• Multi-member LLC (MMLLC) is one that has multiple owners.

Advantages of LLC

Some of the essential benefits of LLC are as follows:

• Asset and Liability Protection

The personal assets of the owner/s are at risk in case of a Sole Proprietorship or Partnership. Their personal assets like car, home, bank accounts, etc. can be used for clearing unpaid debts or settlement if someone sues the company.

Things are not the same in case of LLCs. They offer personal asset protection. However, there are exceptions to the protection.

You create a separate entity when you create an LLC. You are not responsible on a personal level in case of unpaid company debts or court settlements. You don’t get the same protection with Sole Proprietorship or Partnership.

• Tax Saving

IRS considers LLCs as “pass-through” tax entities. This means that all the income, gains, losses, deductions, tax credits, etc. are “passed” through the owner/s. Reporting of all of these amounts will happen through the individual return of the owner/s.

Tax payment is as per their individual tax rate of the owner/s.

Active members of the LLC can also deduct operating loss against their regular income. Moreover, you will not be paying any unemployment insurance taxes on your salary as an LLC member.

But LLC members have to pay self-employment taxes based on their profits or remuneration from the company.

• Easy Business Transfer

The company owner has to individually transfer all the business documents for transferring or selling the business in a Sole Proprietorship. Selling your interest is a very time consuming and complicated process with Partnerships too.

You can transfer LLC to your next generation or any 3rd party without disrupting the business operations in any way.

Some other advantages of creating an LLC:

• No restrictions on the number of owners
• Easier to place ownership interests for beneficiaries in a living trust
• Flexibility in terms of raising capital

LLC vs Corporation, Partnership, and Sole Proprietor

There are several nuances between how all the different business structures function. We’ve only considered some of the factors that are most important for every new business owner in this comparison.

• Ease of Starting

As compared to other business structures, Sole Proprietorship is the easiest to start. Apart from the appropriate permits and licenses that your business needs, you don’t need any other formal action.

Sole Proprietorship is closely followed by Partnership in terms of the ease of starting the business.  You need to file a number of organising documents with your state office in case of a Corporation or LLC.

But starting an LLC is generally easier as compared to a Corporation in most states.

• Maintenance and Management

A Sole Proprietorship and even a Partnership is the easiest option even in terms of maintenance and management. Unlike a Corporation, you don’t have to engage in any kind of formalities with regards to your business operation.

Ease of maintenance and management of LLC is somewhat in between Corporation and Sole Proprietorship. In most of the cases, LLCs do not require organisational or decisional formalities of a Corporation. But some state laws do ask for regular reports from LLCs too.

• Personal Liability Protection

This is the area where LLCs and Corporations are a better option. Your company is not seen as an entity separate from you if you have a Sole Proprietorship or Partnership.

This means that your personal assets are at risk with these structures in case of unpaid debt or settlement of the lawsuit.

With LLC or Corporation, you create a business entity separate from you. This keeps your personal assets protected. While LLCs and Corporation both protect your personal assets, LLCs are generally more beneficial.

They are easier to start as compared to Corporation and also easier to maintain. Even the scope of saving money in taxes is better in LLC than Corporation.

• Tax Treatment

Sole Proprietorship or Partnership owners have to report all their business expenses and income in their personal tax return. If you form a Corporation, you have to file separate tax for your company.

The tax treatment of LLCs is unique. They have the flexibility to choose between a Sole Proprietorship or Partnership based on the number of owners, or even a Corporation. The IRS does not consider LLCs as a taxing entity.

In short, LLC is one business structure that offers that benefits of Sole Proprietorship or Partnership along with those of a Corporation.

But there are also a few drawbacks of creating an LLC.

Disadvantages of LLC

Here are few disadvantages of LLC, which you should know:

• Cost of Starting an LLC

An LLC is more expensive to start and operate as compared to Sole Proprietorship or Partnership. But it is still cheaper than starting and managing a Corporation.

• Limitations to Personal Asset Protection

The personal asset protection offered by an LLC is not absolute. There are a few limitations to it like

• Liabilities due to own wrongdoing
• Direct and personal injury to someone
• Unpaid payroll taxes
• Personally guaranteed debts

Self-employment Taxes

The owner/s has to pay self-employment taxes in LLCs that receive treatment of a Sole Proprietorship or Partnership for tax purposes. But if the LLC receives tax treatment of a Corporation, then there are no self-employment taxes.

Life of LLC

A multi-member LLC no longer exists if any of its members depart. Operating Agreement of the LLC is usually used for eliminating this problem.

Types of LLC

There are also different types of LLCs to help business owners select one that best suits their requirements. Some of the most popular ones are-

• Domestic LLC– If an LLC only operates only in the state of its creation, it can be a Domestic LLC.
• Foreign LLC- If a Domestic LLC has to register itself as a Foreign LLC if it wants to shift the operations to a different state or expand to another state.
• Professional LLC- LLCs involved in professional services like legal practices or accounting register themselves as a Professional LLC.

LLC Taxation

LLCs do not directly pay taxes to the IRS. They use the “pass-through” taxation system where all the profits, losses, tax credits, deductions, etc. are passed to the owner.

• Taxation of Single-Member LLC

The single owner of the company will pay taxes of the company on his/her Form 1040 in case if it is an SMLLC.

• Taxation of Multi-Member LLC

Each owner of the company pays taxes as per their share in the company in MMLLCs. First Form 1065 is used for filing an information return. The information return reports the gains, income, losses, credits, deductions, etc. of the LLC members.

Schedule K-1 is then filed to show the profit or loss share of every owner. Form 1040 of every owner shows the profit or loss of their LLC.

• Taxation of LLC Treated as Corporation

If the LLC can take advantage of lower tax rates, they can also elect tax treatment of a Corporation. The standard corporate tax rules will apply to each of its members in such cases.

Is LLC Right for Me?

LLC is an excellent option for the majority of small businesses. It offers a great combination of simplicity, flexibility, and personal asset protection. Unlike a Partnership or Sole Proprietorship, an LLC keeps your personal assets protected in most cases.

Unlike Corporations, LLCs are easier to create and maintain and are also protected from double taxation.

But even after knowing these benefits, you should avoid taking any quick decisions. You should first talk to an attorney with considerable Corporation and LLC experience. Next, talk to a CPA who thoroughly understands the tax differences between all the different business structures.

Based on your discussion with the attorney and CPA, you can decide whether or not you’d like to register as an LLC.

The post What is an LLC? Is it Best suited for your Business? appeared first on .

source https://businessentity.org/learning-center/llc/what-is-an-llc/

LLC Taxation: How Does It Work?

Looking for the right business structure for your new venture?

Creating an LLC can be the solution if you want to keep your personal assets protected as a business owner.

While there are some limitations to this protection, it is still one of the biggest advantages of LLC. As a matter of fact, it is the sole reason why many businesses prefer LLC over Sole Proprietorship and Partnership.

Apart from this protection, another important reason for selecting LLC is the taxes. A lot of new businesses prefer LLC over Corporation mostly due to this taxation benefit.

If you’re all set to create an LLC, understanding how LLC taxation works is important too.

So, how do LLCs pay taxes? Let us have a detailed look.

How Does IRS Treat LLC Taxation?

An LLC is not a taxing entity as per the IRS. If the LLC has multiple owners (known as members), IRS taxes it as a Corporation or Partnership. Its taxation will be similar to Sole Proprietorship if there is only a single owner or member.

IRS treats single owner LLCs as disregarded entities. A disregarded entity is separate from the owner for all the purposes except taxation. This means that their taxation is done through the personal tax returns of the owner.

In simple words, the taxation of LLCs depends on the number of owners or members an LLC.

How Do Single Member LLCs Pay Income Tax?

The taxation of single-member LLC is done just like a Sole Proprietorship. LLC itself will not pay taxes or file returns. The single owner of the LLC has to report all the profits or losses on Schedule C. The same is then submitted with the form 1040 or other tax return form.

A lot of LLCs also leave some profits in their bank account at the end of the year. This is usually for covering expenses, business expansion, etc. Income tax is payable on this profit as well.

How Do Multiple-Member LLCs Pay Income Tax?

When it comes to LLCs with multiple owners or members, their taxation is generally done just like a Partnership. Individual partners need to pay taxes as per their ownership share in a Partnership. The Partnership entity itself does not directly pay taxes to the IRS. The same rule applies to LLCs that are Partnerships.

Form 1065 is used by a Partnership as well as an LLC treated as a Partnership for tax purposes to file an information return. This is followed by preparing Schedule K-1 for every partner. It shows the total profit or loss share of every partner during the financial year.

Then this K-1 filing is done with that of the individual return of every partner. The Form 1040 of individual partners show the profit or loss of their partnership. Each partner will also attach Schedule E with the return form.

Example
For instance, if there is an LLC with four owners who equally share the business.

Let us assume that the LLC made $100,000 in profits in the financial year. So, the profit share of every owner will be $25,000.

This $25,000 is the amount on which each owner will have to pay income tax of their LLC.

What About LLCs Classified as S Corporation or Corporation?

LLCs are also allowed to be classified as S Corporation or Corporation for tax purposes. The LLC generally selects these options if it enables them to reduce the tax burden.

As an S Corporation or Corporation, the LLC will pay income tax as per the new 2018 tax status. The new tax designation changes the way how the individual members of the LLC pay taxes.

However, the LLC continues to function as an LLC as per the company’s operating agreement.

LLCs Paying Estimated Taxes

All the owners or members of an LLC are considered to be self-employed. As a result, they are not subject to any tax withholding. This means that the members have to pay self-employment and estimated taxes to their state tax office and IRS. This needs to be done on a quarterly basis.

However, multi-member Partnerships can also have inactive members. These are the members who have invested money in the business but do not participate in the everyday functioning of the company.

They do not offer any kind of service to the business nor take any management decisions. Such inactive members can be exempt from paying self-employment tax.

LLCs and State Income Tax

LLC classification for state income tax purposes is different in every state. Most states use the IRS classification but have made changes in the applicable tax rate.

For instance, LLCs in Florida that are classified as Partnerships have to pay Partnership taxes. In case of a Corporation, Corporate taxes are applicable. LLCs which are Sole Proprietors are not required to pay a separate business tax. It uses federal taxable income and has made changes to it.

On the other hand, in California, LLCs that are disregarded entity or Partnership pay $800 as state income tax. They have to file a particular return. But the LLCs that are classified as Corporations file a different return and pay appropriate taxes.

Taxation of LLCs in Case of Losses

LLC taxation is mostly beneficial if the LLC is making profits. But the same is not true in case of losses. As your personal liability in your company is limited, you’re not allowed to deduct all the losses. Some of the states charge additional fees and taxes on LLCs.

You can check how your state treats LLC tax implications to know more. In most cases, this additional fee is a flat annual tax.

For instance, in California, there are two different fees for state-registered LLCs that make $250,000+. Keep a close eye on the tax developments on the state as well as federal level to know all the key changes.

Conclusion

While this might look like a lot of information to digest at once, you will surely get better with time. Try to know at least the basics of how LLCs pay taxes if you are new to owning a business and are planning to create an LLC.

This will make it easier for you to understand tax discussions with your legal advisors.

Try to keep learning about tax laws for LLCs as this can protect you from legal troubles. Moreover, with a bit of experience, it can also help you save a lot of money.

The post LLC Taxation: How Does It Work? appeared first on .

source https://businessentity.org/learning-center/llc-taxation-how-does-it-work/

How Can an LLC protect Your Personal Assets?

Want to run a business?

Thinking about what will happen to your personal assets in case things don’t go as planned?

The modern world of entrepreneurship is so competitive that it is challenging to find a footing without moving fast and thinking big.

New entrepreneurs and agility go hand-in-hand. However, the problem arises when entrepreneurs start overlooking things that are critical to the existence of business and themselves. Many of these things could result in severe legal and financial mistakes.

And one of the most common beginner’s mistake is not to set up a legal entity.

The Outcome of Not Creating a Legal Entity

Without a legal entity, the law treats your business as a Sole Proprietorship or a Partnership. Both these business structures do not protect your personal assets like the bank account, home, car, etc. If you have unpaid debt or an entity/individual files a suit against you, these assets can be used for the settlement.

And if you know anything about the modern world of business, the days when only the bad guys were dragged to the court are long gone. If you are transacting business even with the general public, you expose yourself to several potential lawsuits that can end up consuming your personal assets.

So, What is the Solution?

As you might have already understood, the solution is to create a legal entity. But what kind of legal entity? Preferably an LLC.

Let us have a look at how LLC can protect your personal assets.

LLC: Advantages of Partnership/Sole Proprietorship and Corporation in One Business Structure

In simple words, LLC creates a type of buffer between the business liabilities and your assets. While setting up an LLC is more complicated than a sole proprietorship or partnership, once established, it is significantly easier than a corporation to run.

However, the protection or the buffer is in no way absolute. Understanding the limited liability protection and exceptions would make it easier for you to make the right decision.

How Does the Limited Liability Protection of LLC Works?

Once created, LLC helps you form a business entity which is separate from the owners, legally. This separation is the buffer of personal asset protection. However, it is limited in nature.

With this limited liability protection, the creditors are only allowed to use the bank account and other assets of the LLC for settling debts or liabilities. This means that the personal assets of the owners, like their bank accounts, homes, and cars etc. remain safe.

In other words, if you’re an owner of an LLC, at the most, you’ll lose the money you’ve invested in your business.

Let us now have a look at the exceptions to this limited liability.

Limited Liability Exceptions

Just as every other thing in life, the limited liability of LLC also has exceptions. The same limitations along with others also apply to corporations. Some of them are as follows-

• Personally guaranteed debts
• Unpaid payroll taxes
• Liability due to own wrongdoing
• Direct and personal injury to someone
• Mixing LLC with Personal Assets

While there are a few exceptions in limited liability, it is still one of the biggest advantages of creating an LLC. Moreover, there are a few ways in which you can keep yourself protected.

Tips for Protecting Your Assets as Owner/Co-Owner of an LLC

• Keep your personal business and LLC separate
• Adequately fund your LLC
• Act legally and fairly
• Try to take credit in the name of your LLC
• Obtain an LLC insurance

To Conclude

Creating a legal entity in the form of an LLC is a wise decision if you are planning to launch a new business. Even with the exceptions and certain limitations, it offers excellent protection to your private assets which sole proprietorship or partnership do not provide. Moreover, it is also easier to run an LLC as compared to a corporation.

Remember the tips discussed above to tackle the exceptions of limited liability protection and avoid risking your private assets as a business owner.

Apart from these tips, there are also other strategies to keep your assets protected. These strategies would depend on the state where you conduct your business. Consult your legal advisor for the same.

The post How Can an LLC protect Your Personal Assets? appeared first on .

source https://businessentity.org/learning-center/how-can-an-llc-protect-your-personal-assets/