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Everything You Need to Know Before Forming Your Own LLC

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One of the most popular choices of small business owners is an LLC (limited liability company). This is largely due to tax advantages, liability protection, and flexibility of management that typically comes with this kind of business entity. In order to achieve success in business, there are several things you need to know before looking to get funded and starting your LLC.

What is an LLC?

LLC is a type of business structure wherein entrepreneurs get pass-through taxation and limited liability protection. The LLC is similar to a corporation in that it exists legally as an entity that’s separate from its owners. Sometimes, owners are also known as members. It’s usually not possible to hold owners personally responsible for any liabilities and debts of the business.

Pass-through taxation is allowed for by an LLC as the taxation of income doesn’t happen at the entity level. A tax return for the LLC is necessary for LLCs who have two or more owners. Losses or incomes of the LLC that appear on that return get passed to the owner/s. Owners must then report loss or income on their own personal tax returns, then pay any due tax.

What are the benefits of forming an LLC?

There are several options available for anyone looking to start a business. This includes forming a corporation, a sole proprietorship, or entering into a general partnership. Another option is the limited liability company. There are several advantages to making the choice to go into an LLC, such as:

Pass-Through Taxation

Taxes for LLC are not paid on the business entity level. Any loss or income is “passed-through” to the members, which are then reported on their personal income tax returns. Due taxes are paid on an individual level. It’s very helpful to hire an accountant as part of a team when you begin forming your LLC.

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Management

Corporations typically fall under the management of a board of directors. LLC members can either manage things themselves or elect their choice of management groups.

Limited Liability

There is no personal liability on the part of owners for acts of other owners or the LLC itself. This is one of the appeals of forming one. Business debts cannot be settled by creditors when they pursue personal assets like the savings accounts or houses of members. In contrast, general partners or sole proprietors can be pursued regarding the debts of the business. However, it should be noted that an LLC (and corporation) can lose its limited liability.

Flexible Membership

Owners/members can come in many forms, not just individuals. There are corporations, trusts, and partnerships as well. The number of members that can be part of an LLC is limitless. The restrictions on S corporations (essentially a corporation that chose to be taxed as a pass-through entity under the Internal Revenue Code’s Subchapter S) are much tighter in terms of who is considered a shareholder. There are only so many people or entities who can be a member.

Conclusion

An LLC, or limited liability company, is one of the most popular choices of smaller business owners. Membership is flexible, and there is no maximum for who can be part of it. There are several benefits to this, including management flexibility and tax advantages. 

Need help with accounting for startups? Contact FiBrick today! We are a people-centric accounting firm that offers a suite of services for startups and scale-ups.

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