What Type of Company Should I Set Up? What are LLCs?
- August 20th, 2014
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If you’re stuck wondering to yourself, “What type of company should I set up?” it’s important to get a good understanding of all of your options before making a decision. Are you familiar with Limited Liability Companies? They’re a particularly interesting type of business, because they take elements from the different types of corporations and the different kinds of partnerships to form a kind of hybrid company structure.
What Type of Company Should I Set Up?
How an LLC is Like a Corporation
A Limited Liability Company (LLC) adopts the same liability provisions of a corporation in order to protect the company’s owners both legally and financially. As far as the federal government is concerned, LLCs are not separate tax entities, and for this reason they need to file as either corporations, partnerships, or sole proprietorships. Some LLCs are automatically classified and taxed as corporations by federal tax law. The limited liability aspect of an LLC is primarily for legal purposes, protecting the LLC’s members from personal liability in case the business winds up owing money or facing a lawsuit of some kind. In these situations, only the LLC’s assets could be sought after, not any of the members’ assets, such as their homes or vehicles. That being said, if shareholders act illegally, unethically, or irresponsibly in their professional duties, that protection can be lost.
How an LLC is Like a Partnership
LLCs are most like partnerships in the way that they are taxed. As we said earlier, the federal government doesn’t consider LLCs to be independent entities, which means that profits and losses are “passed down” to the members of the LLC—LLCs don’t have “owners,” but instead have “members,” who can be a single individual, multiple individuals, corporations, or other LLCs—who then report those numbers on their personal federal tax returns. If your LLC is not automatically classified as a corporation, you need to choose one of the following business entity classifications: Single Member LLC, Partners in an LLC, or LLC filing as a Corporation.
LLCs can also be designated as S Corporations if they meet the IRS’ required criteria. For legal purposes, a LLC would remain a Limited Liability Company, meaning that its liability responsibilities would not be altered, but for tax purposes it could be treated as an S Corporation.
Many say that the structure of an LLC combines the best features of both partnerships and corporations. If you think an LLC might be right for you, but you’re still asking yourself, “what type of company should I set up?” Then you need the advice of a professional, so call the tax experts at JRH & Associates at (516) 794-5752 today!