A Limited Liability Company (LLC) is a formal way of structuring your business compared to a partnership or sole proprietorship.
This free legal information is made available courtesy of Counsel to Creativity.
When forming your business you ideally create a separate, distinct legal entity. Your business is its own thing, in other words. It is separate and legally distinct from you personally. It rises and falls on its own and has its own liabilities and obligations–separate from you. You form it by filing with the state in which the business resides or conducts business.
The LLC can be a good choice of entity for creative entrepreneurs because it’s flexible and relatively simple to form. You keep records the way you need to keep them in order to run your business and file your taxes (with your special tax I.D.). It takes the business’s liability away from you, and you have the option to get the tax benefits given to small corporations.
How An LLC Works
The Limited Liability Company (LLC) creates a separate entity—distinct from You—for your business, and it takes on responsibilities and liabilities of its own. Although you (with or without partners) have still gone into business, with the LLC, we’ve moved outside of you having personal responsibility for the control, liability and tax of your business. The business itself takes on its own responsibilities and liabilities. The business is literally its own entity, outside of you, and it operates separately and distinctly from you.
Remember that when we talk about Control of your business, we’re talking about how the business is owned and how the business is managed. A business can be owned and managed separately. The owners do not need to manage the business and the managers (those who conduct the day to day operations of the business) do not need to own the business. With an LLC is where we first start to see how this works.
In an LLC, you and any other owners of the business are called members. Members can centralize control by both owning and managing the business themselves. If you are a solopreneur, you centralize control of the LLC in yourself: you own it as a single member and you manage its operations. Members of an LLC can also choose someone who is not a member to manage the business. This makes the LLC flexible.
The LLC has liability for its own debts and obligations; the members do not have personal liability for the obligations of the business. (They can’t get my house? Yay!)
When you form an LLC, you have a choice in how you file and pay your taxes: you can elect to be taxed as an S-Corporation or you can be taxed like a sole proprietor (or partnership) on Schedule C of your personal return. Depending on how much your business grows and how much money it makes, you may be able to get tax breaks by forming an LLC and filing as an S-Corp. According to my tax advisor, the rule of thumb is that at $40,000 of profit—that is profit, not revenue—you will gain a tax advantage from filing as an S-Corporation.
Some of the key tax advantages that filing as an S-Corp can have are that, if you pay yourself a minimally reasonable salary as an employee, you do not pay self-employment taxes and you can draw un-taxed member distributions. This gives you the benefit of a lower corporate tax rate for personal income. You should definitely talk to your tax preparer about any possible tax advantages before deciding which entity is the best fit for your business.
In the comments below, let me know what your number 1 aha! is about the LLC and the structure of your business.
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Looking to change your business to better suit your life? Rebecca Prien also provides business coaching and business model design services through Ompreneur | The Yoga of Entrepreneurship.