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Should I Form An LLC? Are there Do-It-Yourself Software?
By RPBCO
Dated: Jan 02, 2008
Many business owners are forming LLCs to corporations or partnerships because LLCs have advantages of
both: with an LLC, the members can have the corporate-like liability protection, and enjoy the tax
advantages of partnerships or "S" Corporations.
An LLC is a business structure recognized by all 50 states and Washington, D.C. An LLC is a separate
legal entity (as is a corporation). For money, property, expertise or "sweat equity" invested into the
company, the LLC issues certificates or units that indicate the particular investor's percentage of ownership
in the business (compare to a corporation that issues shares of stock to its shareholders).
Some ADVANTAGES of forming a Limited Liability Company are:
- Provides protection of personal assets from business debts and other obligations;
- Profits/losses pass through to personal income tax returns of the members;
- Provides great flexibility in management and organization of the business;
- LLCs do not have the ownership restrictions of S Corporations, making them ideal business structures for
"non-traditional" investors.
Some DISADVANTAGES of forming a Limited Liability Company are:
- LLCs often have a limited life (not to exceed 30 years in some states)
- The state of Massachussetts requires at least two members to form an LLC (whereas all corporations can
have one shareholder);
- LLCs are not corporations and therefore do not have stock, thereby creating some difficulty in both the
transfer of ownership of the company and/or the distribution of benefits.
The Standard Legal Software LLC program includes the Articles of Organization and all of the other
state-specific forms and up-to-date instructions required to create a Limited Liability Company. The
program also includes three different types of Operating Agreements:
- Multi-Member MEMBER-Managed Operating Agreement;
- Multi-Member MANAGER-Managed Operating Agreement;
- Sole Member Operating Agreement
Offering three different Operating Agreements allows the members of the LLC to clearly define the roles
of each investor/member in managing and operating the business, and how profits will be disbursed. The
software also includes a LLC Unit Certificate template that can be completed and provided to each member
of the LLC, showing the number of "units" (like shares) that are held by that member.
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In addition to the required forms and instructions, a detailed examination of a variety of business structures
is provided, so that the members creating the LLC can make certain that an LLC structure is the best for
their business situation.
A Limited Liability Company (LLC) protects your assets like a corporation, but without the burden of
corporate maintenance. (Compare: LLCs vs Corporations.) That's why it's becoming the most popular way
to start a business.
With a LLC, you can elect to be taxed as a corporation, or avoid "double taxation" by choosing to be a
"pass-through" entity.
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Comparing an LLC to a Corporation
The decision to form an LLC or a corporation is a common debate among business owners that deserves
careful consideration. While both are excellent choices for personal liability protection, each entity offers
its own set of distinct advantages. Choosing the right one for your company depends on your particular
business, operational needs and tax strategy.
Advantages of an LLC compared to a corporation
Fewer corporate formalities.
Corporations must hold regular meetings of the board of directors and shareholders, keep written corporate
minutes and file annual reports with the state. On the other hand, the members and managers of an LLC
need not hold regular meetings, which reduces complications and paperwork.
No ownership restrictions.
S corporations cannot have more than 100 stockholders, and each stockholder must be a U.S. resident or
citizen. There are no such restrictions on LLCs.
Ability to use the cash method of accounting.
Unlike C corporations, which often must use the accrual method of accounting, most limited liability
companies can use the cash method of accounting. This means income is not earned until it is received.
Ability to place membership interests in a living trust.
Members of an LLC are free to place their membership interests in a living trust. It is difficult to place
shares of an S corporation into a living trust.
Ability to deduct losses.
Members who are active participants in the LLC’s business can deduct its operating losses against the
member's regular income to the extent permitted by law. Shareholders of an S corporation are also able to
deduct operating losses, but shareholders of a C corporation are not.
Tax flexibility.
By default, LLCs are treated as a "pass-through" entity for tax purposes, much like a sole proprietorship or
partnership. This means that LLCs avoid double taxation. Furthermore, an LLC owner is not required to
pay unemployment insurance taxes on his or her own salary. However, an LLC can also elect to be treated
like a corporation for tax purposes, whether as a C corporation or an S corporation.
Disadvantages of an LLC compared to a corporation
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Profits are subject to Social Security and Medicare taxes.
In some cases, LLC owners may end up paying more taxes than owners of a corporation. Salaries and
profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. With a
corporation, only salaries (and not profits) are subject to such taxes. This disadvantage is most significant
for owners who take a salary of less than $90,000.
Owners must immediately recognize profits.
A C corporation does not have to immediately distribute profits to its shareholders as a dividend. This
means that shareholders in a C corporation are not always taxed on the corporation's profits. Because an
LLC is not subject to double-taxation, profits are automatically included in a member's income.
Fewer fringe benefits.
Employees of an LLC who receive fringe benefits, such as group insurance, medical reimbursement plans,
medical insurance and parking, must treat these benefits as taxable income. The same is true for employees
who own more than 2% of an S corporation. However, C corporation employees who receive fringe
benefits do not have to report these benefits as taxable income.
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Category Accounting, Business, Legal
Tags Llc, Forming An Llc, Llc Vs Corporation
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Website http://SLegal.4WebIncome.org
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