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New LLC Guide

New LLC Guide

What is a LLC?
-An LLC, Limited Liability Company, is a
legal entity separate from its owners, and organized
under the business law statutes of each
state.
-All states have LLC legislation and the rules
vary from state to state.
-
The LLC is created by filing Articles of Organization
at the state level.
-
As a separate entity, the LLC has the power
to conduct business in its own name. It can
sign contracts, buy property, be sued
-
An LLC can have a single owner (member)
or a number of members. There is no limitation
to the number.
-
Similar to a Corporation, the LLC offers
limited liability to its members, which includes
personal asset protection.
-
The LLC offers business asset protection from
the personal debts of the members. Creditors
cannot seize LLC property or force a member
to liquidate due to personal debts..
-
The LLC form of organization offers contractual
flexibility in that the members can alter
the operating agreements to suit their needs.
-
Most state rulings on LLCs are relatively
informal. The lack of formal rulings make
decision making easier.
-
The LLC form of organization is very flexible
from a taxation standpoint because it allows
various options for filing and paying taxes.

LLC Tax Options
An LLC can be taxed as any one of the following entities:
-Sole Proprietorship
-Partnership
-C Corporation
-S Corporation
To elect one of the above Federal tax classifications, the LLC files Form 8832 to make its choice.
If the LLC does not file Form 8832 to choose a classification,
A single-member LLC defaults to a Sole-Proprietorship.
A multi-member LLC defaults to a Partnership.

Should You Organize Your Business As An LLC?
The answer is most likely YES. Nowhere
else will you get limited liability
teamed up with limited regulations
and ease of operation.

The corporate form was set up for
large business, and along with limited
liability, comes the disadvantage of
rules and complicated structure.

The Sole-Proprietorship, on the other
hand, is easy to operate, but liability to
the owner is unlimited.
THE LLC OFFERS THE BEST
OF BOTH WORLDS.

Getting Started Checklist
You can use the following checklist to get started. Because the LLC is a legal entity, thehelp of an attorney is advised, but you can do it yourself as long as you do your research.

-Decide on a business name for your entity. Most states require some variation of LLC to be
included in the name. Check with your state for details.
-According to the laws of your state, file the Articles of Organization for your LLC.
-Decide which tax entity best suits your business for Federal tax purposes and file Form 8832 to
check the box. You must stay with your initial choice for 60 months, so, choose wisely.
-Outline your rules of operation with an Operating Agreement. The Operating Agreement is generally
not required for the LLC to be valid, bit it s wise to map out your intentions. Items to include are:
*Name and address for LLC and each member
*Registered agent
*Management structure and operation
*Items contributed by each member
*Accounting method
*Tax treatment for the LLC
*Operating procedures
*Appointment of officers
-Arrange a schedule for regular meetings. Not all states require meetings, but meetings help the
business stay on course.
-Open a bank account. Your LLC is a separate entity, and it needs its own bank account. It
needs to be separate from your personal finances.

WHICH FEDERAL ENTITY BEST SUITS YOUR LLC?
You have 3 choices ranging from simple to complex.
Single Owner LLC
Sole Proprietor
(Default)
For Federal tax purposes,
this is a disregarded entity, and
no separate ID is required.
Combines ease of operation
with limited liability.
No complicated, separate
tax returns are needed just
Schedule C with Form 1040.
The LLC owns and protects
the assets of the Sole-
Proprietorship.
On the downside, the
Sole-Proprietorship is subject
to Self-employment tax on
net business profit. As income
increases, this can become
costly.


Multiple Owner LLC
Partnership (Default)
The simplicity of the partnership
organization is combined
with the limited liability of the
LLC.
A member may be classified
as either a General Partner
or a Limited Partner.
Members who have contract
authority and engage in
LLC business are General Partners
and will pay self-employment
tax on their earnings.
Limited Partners who are
passive investors, lack contract
authority, and work less
than 500 hours a year are not
subject to SE tax on their
earnings.
The LLC files a separate
Partnership tax return on
Form 1065 in which the
income flows through to the
partners and is taxed at the
individual level.
The LLC owns and protects
the assets of the Partnership,
and when these assets
are distributed, the appreciation
will not be taxed. For this
reason, LLCs organized as
partnerships are good vehicles
to hold real estate.
On the downside: As income
grows, so does selfemployment
tax for the General
Partner.














Single Owner LLC
S Corporation
In addition to checking the
box on Form 8832, you need
to file Form 2553 to elect
status as an S Corporation.
This form of organization
is much more rule oriented
than the Sole-Proprietor.
The members of the LLC
operated as a Corporation
are employees and are paid
wages. By rule, the wages
need to be a fair amount for
the work done.
The S Corporation files a
separate tax form, 1120S,
and passes its profits through
to the individual level for
taxation. These profits are
not subject to Social Security.
Thus, high income S Corporations
will be able to avoid
Social Security on profits in
excess of wages. Note: the
IRS is currently investigating this
SE tax avoidance with a series of
audits. It s very important topay
a reasonable wage.
The LLC filing as an S
Corporation would have
business asset protection from
personal debts of the members.
An S Corporation that
is not an LLC would not.


Multiple Owner LLC
S Corporation
In addition to checking the
box on Form 8832, you need
to file Form 2553 to elect
status as an S Corporation.
This form of organization
is much more rule oriented
than the Partnership.
The members of the LLC
operated as a Corporation
are employees and are paid
wages. By rule, the wages
need to be a fair amount for
the work done. Distributions
to the members, other
than wages, need to be paid
in the same proportion as the
ownership percentage.
The S Corporation files a
separate tax form, 1120S,
and passes its profits through
to the individual level for
taxation. These profits are
not subject to Social Security.
Thus, high income S Corporations
will be able to avoid
Social Security on profits in
excess of wages.
Note: the IRS is currently investigating
this SE tax avoidance with
a series of audits. It s very important
to pay a reasonable wage.
The LLC filing as an S
Corporation would have
business asset protection from
personal debts of the members.
An S Corporation that
is not an LLC would not.
Single Owner LLC
C Corporation
You need to check the box
on Form 8832 to elect taxation
as a C Corporation.
This business setup is designed
for big business and is
structured in a complicated
way that requires the owner
to follow many rules.
The members of the LLC
are employees and get a W-2.
The LLC files Form 1120
and pays tax on the corporate
level on the profits.
When the members take the
profits from the Corporation,
they are taxed again as
dividends. This form of
business is not for everyone.
Careful planning is essential.
The LLC filing as a C Corporation
would have business
asset protection from the debts
of its members. A C Corporation
that is not an LLC
would not. Note: Be careful
not to include appreciable
property in a Corporation or
it will be double taxed when
it is sold.
Members who desire a
benefit package might want
this form of organization
because the benefits can be
deducted by the company,
reducing Corporate tax.

Multiple Owner LLC
C Corporation
You need to check the box
on Form 8832 to elect taxation
as a C Corporation.
This business setup is designed
for big business and is
structured in a complicated
way that require the owners
to follow many rules.
The members of the LLC
are employees and get a W-2.
The LLC files Form 1120
and pays tax on the corporate
level on the profits.
When the members take the
profits from the Corporation,
they are taxed again as
dividends. This form of
business is not for everyone
and careful planning is essential.
The LLC filing as a C Corporation
would have business
asset protection from the debts
of its members. A C Corporation
that is not an LLC
would not. Note: Be careful
not to include appreciable
property in a Corporation or
it will be double taxed when
it is sold.
Members who desire a
large benefit package for
employees might choose this
form of organization because
the benefits can be deducted
by the company, thus reducing
Corporate tax.

State Filings

Check your state to see what forms need to be filed. Some states require separate tax
returns and annual reports. To ensure the protection of your LLC, make sure you follow
all of the rules. Remember: The word limited in the title of this type of entity means exactly
that. No business organization is 100% exempt from the actions of its owners.