Over the years an LLC Company has become a popular type of entity to form. There are significant tax savings, for example for incorporating from a sole proprietorship. As a sole proprietorship, you are considered self-employed. What this means to the IRS is that you pay a self employment tax. As an employee of a company, you pay 7.65% employment taxes. However, as a sole proprietorship, you pay double that, or 15.3% (IRS 2013 and 2014 new rate). Many people who decide to own their own business don't want to hassle with the process of incorporating, especially when they are small and are single owned businesses. It makes much better financial sense to start or restructure your company into an LLC just with the tax reductions and is much easier than one may actually think. In restructuring your company into an LLC company, your net income from the S-Corporation is not subject to self employment tax since the IRS regards it as a separate entity. Instead, the income is "passed through" to your personal tax return, (i.e. no double taxation) resulting in significantly lower taxes to you, the owner. Most LLCs are organized with something called an operating agreement, and as a single member the IRS allows you to elect to be either a corporation or a disregarded entity. You may also be a multi member LLC and choose if you want to operate as a partnership or corporation. By electing a status with the IRS, you become classified as such. The advantages are listed below:
1. No requirements of an annual general meeting of shareholders.
2. No loss of power to a board of directors.
3. Much less administrative paperwork and recordkeeping than a corporation.
4. Pass through taxation (no double taxation).
5. Limited liability, meaning the owners of the LLC.
6. Can be elected to be taxed as a sole proprietor, partnership, S-Corporation, or C-Corporation which provides much more flexibility.
7. Great for getting loans and small business investors who can sell "shares" or interest in the company to help fund the startup of the company. Friends and family can be investors, as well.
Disadvantages of the LLC are as follows:
1. Many states levy a franchise tax, or capital values tax on LLC's. The franchise tax can be an amount based upon revenue, profits, or the number of owners, or some combination of these or simply a flat fee. In most states, however, the fee is small.
2. When you operate as an LLC company, any loans a lender allows you to borrow will be personally guaranteed and/or your personal assets will be pledged to guarantee repayment. When you guarantee or personally co-sign causes all of your separate property and either half or all of your personal property you jointly own with a spouse can be eventually taken by the lender if you default on theloan.
3. Although there is no statuatory requirement for an operating agreement in most states, members who operate without one can run into problems.
4. Some people aren't familiar with the fact that unlike corporations, LLC's aren't required to have a board of directors or officers.
There are so many advantages to incorporating into an LLC company, especially the tax savings that make it to one's benefit to restructure. However, the choice is yours and situations determine what a company decides to do. If you would like to restructure into an LLC corporation, once you get all necessary steps done to set it up with your own state, we would be happy to help you with that process. Just purchase our LLC restructuring kit and we will give you all of the necessary information in an easy step by step way, along with all the forms and how tos to get your company transferred or started as an LLC company.
Copyright Jeanine Pfeiffer