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Is A Limited Liability Company The Right Move For Your Business?
Forming an LLC can be extremely satisfying and give you a sense of accomplishment. There are several advantages of forming an LLC that you should know about. The members (or owners) have a limited personal liability for debts incurred, taxes can be claimed on the member's personal tax returns instead of claiming for the business earnings and then their own earnings. There are also disadvantages in structuring a Limited Liability Company. Let's go over some fundamentals involved in forming an LLC:
About Liabilities:
Members are not normally held responsible for the company's debts that they did not personally pledge. Their assets including savings accounts and homes are protected if the company falls into bankruptcy or if it is under a lawsuit. That said, that is not always the case. Courts can set aside limited liability and hold shareholders or directors personally responsible for the company's debts which are known as “Piercing The Corporate Veil”. This usually only happens when there have been charges of fraud or other criminal actions by the members. This is not an area that is easily predictable because the courts will deem what they consider and criminal act or fraud.
About Ownership:
A Limited Liability Company is not required to have a certain set of members. That said, if there is only one owner, then their LLC will be taxed as a Sole Proprietorship. Therefore, you should look into the advantages and disadvantages of a Sole Proprietorship. Owners do not have to be residents or citizens of the US and, in some areas, your LLC can actually be owned or a member of another LLC. As an LLC, you do not have to hold board of directors or shareholders meetings. Members will decide the various aspects of the company such as what management or ownership structure will be in place. Members will determine profit distribution, who will be a managing member, and which members are allowed to vote.
About Taxes:
As mentioned above, members can report the company's profits on their individual tax returns, unlike corporations. They will not be taxed twice on the income of the business and their personal earnings. Members earned income is usually created by running the business and/or through regular pledged payments. One of the best advantages regarding taxes is having the ability to deduct health insurance costs, or any losses incurred by the business and claim it on their individual taxes. Keep in mind, if you are a managing member, your income is subject to self-employment taxes. While members who are not managing members are not held under self-employment taxes, they are limited in what can be deducted on their personal taxes, including company losses and expenses.
Under The LLC's Operating Agreement:
This agreement may be used to dictate how a member's interests are transferred or sold to someone else. For instance, if a member wishes to sell their shares or set up an agreement to pass their shares on to their family, in the case of their death, it can be easily accomplished. This is a great deal easier to carry out and not bog down members with extensive paperwork or company bylaws.
This will protect family members from dealing with problems or facing unforeseen consequences from not dealing with problems that could arise around the corner. The entire process of transferring interests is very easy. When a member dies, the assets are immediately passed on to the family without facing inheritance taxes, in most cases.
There are many excellent advantages but also make sure you understand the disadvantages in forming an LLC. Study up and do your homework to determine if this is the right avenue for you!
Forming an LLC can be extremely satisfying and give you a sense of accomplishment. There are several advantages of forming an LLC that you should know about. The members (or owners) have a limited personal liability for debts incurred, taxes can be claimed on the member's personal tax returns instead of claiming for the business earnings and then their own earnings. There are also disadvantages in structuring a Limited Liability Company. Let's go over some fundamentals involved in forming an LLC:
About Liabilities:
Members are not normally held responsible for the company's debts that they did not personally pledge. Their assets including savings accounts and homes are protected if the company falls into bankruptcy or if it is under a lawsuit. That said, that is not always the case. Courts can set aside limited liability and hold shareholders or directors personally responsible for the company's debts which are known as “Piercing The Corporate Veil”. This usually only happens when there have been charges of fraud or other criminal actions by the members. This is not an area that is easily predictable because the courts will deem what they consider and criminal act or fraud.
About Ownership:
A Limited Liability Company is not required to have a certain set of members. That said, if there is only one owner, then their LLC will be taxed as a Sole Proprietorship. Therefore, you should look into the advantages and disadvantages of a Sole Proprietorship. Owners do not have to be residents or citizens of the US and, in some areas, your LLC can actually be owned or a member of another LLC. As an LLC, you do not have to hold board of directors or shareholders meetings. Members will decide the various aspects of the company such as what management or ownership structure will be in place. Members will determine profit distribution, who will be a managing member, and which members are allowed to vote.
About Taxes:
As mentioned above, members can report the company's profits on their individual tax returns, unlike corporations. They will not be taxed twice on the income of the business and their personal earnings. Members earned income is usually created by running the business and/or through regular pledged payments. One of the best advantages regarding taxes is having the ability to deduct health insurance costs, or any losses incurred by the business and claim it on their individual taxes. Keep in mind, if you are a managing member, your income is subject to self-employment taxes. While members who are not managing members are not held under self-employment taxes, they are limited in what can be deducted on their personal taxes, including company losses and expenses.
Under The LLC's Operating Agreement:
This agreement may be used to dictate how a member's interests are transferred or sold to someone else. For instance, if a member wishes to sell their shares or set up an agreement to pass their shares on to their family, in the case of their death, it can be easily accomplished. This is a great deal easier to carry out and not bog down members with extensive paperwork or company bylaws.
This will protect family members from dealing with problems or facing unforeseen consequences from not dealing with problems that could arise around the corner. The entire process of transferring interests is very easy. When a member dies, the assets are immediately passed on to the family without facing inheritance taxes, in most cases.
There are many excellent advantages but also make sure you understand the disadvantages in forming an LLC. Study up and do your homework to determine if this is the right avenue for you!
