If you’re thinking of starting an LLC, you probably have many questions.
Starting an LLC is a big decision that will impact your life for many years, so you should take the time to gather information and make an informed decision.
The good news is that I’ve gathered the questions I receive most frequently below and provided some answers that you may find helpful.
After you’ve read the article, feel free to email me at [email protected] with your questions and feedback.
Let’s get started…
What is an LLC?
An LLC, or limited liability company, is a type of business structure.
When you form an LLC, you get the benefits of pass-through taxation like you’d have with a sole proprietorship or partnership along with the limited liability of a corporation.
For some business owners, it’s the best of both worlds – providing simplicity and protection.
What Does LLC Stand For?
LLC stands for Limited Liability Company.
What Does LLC Mean?
LLC means limited liability company, which is a type of business structure that protects the owners from the liabilities of the business.
How Does an LLC Work?
An LLC operates with features from both corporations and sole proprietorships or partnerships.
It is a pass-through entity for tax purposes, meaning the business doesn’t file a separate tax return.
Even though an LLC is generally easier to open and manage than a traditional corporation, there are still certain requirements.
These requirements include the articles of organization and the operating agreement.
You should work with a business lawyer to create and file both of these important documents.
The Articles of Organization
The articles of organization establishes the company as a real, legal company. It also outlines who the owners and managers are as well as the registered agent.
This document also describes what the business is in broad terms.
The Operating Agreement
You should check with your state and see if an operating agreement is required by law or not.
If it’s not, you should still draft one because it will help your business’s future operations.
The operating agreement details the members’ responsibilities and duties.
It also breaks down the percentage of ownership, transfer of interests, how the company may be dissolved, and the capital contribution requirements.
The transfer of interests is particularly important because it dictates how members can be added to or removed from the LLC.
When it comes to closing down the business and dissolving the LLC, the operating agreement is essential.
It will state how the assets should be divided, how compensation works for any debts the member guaranteed, and how capital contributions should be returned.
To put it simply, to operate without an operating agreement is not only foolish, but it could cause a lot of problems in the future.
If you need help prepare the articles of organization or the operating agreement for your LLC, email me today at [email protected].
Can I Start an LLC in Any State?
You can start an LLC in any state. However, in most cases, you should start an LLC in your home state to save money and prevent registration as a foreign LLC.
There are some situations in which it makes more sense for you to start an LLC in a state other than your home state.
Some of the best states for an LLC include Delaware, California, Wyoming, and Nevada.
You should consult with a business lawyer to determine if it makes sense for you to start an LLC in any state other than your home state. You can reach me at [email protected]
What is a Single Member LLC?
A single member LLC is an LLC that has only one member. This shouldn’t be confused with a sole proprietorship that isn’t treated as a separate entity.
While a single member LLC is separate from its owner, it is usually treated as a disregarded entity for income tax purposes, meaning you file taxes for the LLC on your personal return.
Some states don’t allow the formation of a single member LLC, so you should check with your state laws to see if this is even an option.
In some cases, you may think choosing a spouse is a good idea to avoid a single member LLC. You should know that the IRS and the courts will likely still consider you as a single member.
If you decide to form a single member LLC, it’s critical that you keep the business separate from yourself. This means detailed records and finances that don’t intertwine with your own.
You’ll also want to keep detailed meeting minutes and any major decisions you make.
LLC Partnership Agreement
An LLC partnership agreement is another name for an operating agreement for multi-member LLCs. It establishes membership, each member’s rights and responsibilities, and provisions for running the company.
There are some states that don’t require an LLC partnership agreement, but it’s not something you should skip if you want your business to run smoothly.
Some of the most important things to include in an LLC operating agreement are:
Decision making responsibilities. Your document should outline how decisions are made (is it a unanimous vote or a percentage?), when all members should be involved in decisions, and who has the responsibility (and how much) of making decisions.Capital contribution. This sections states how much each person contributes to start the business. The section should also discuss what happens if the business doesn’t have enough money in the future.Salaries and distributions. You should specify when members can take money out of the business and if members are repaid for the investments they make into the business.Death and disability. What happens if a member dies or becomes disabled? Your own personal trusts and wills should specify this, but it’s a good idea to put it into the agreement. In some states, the LLC dissolves upon a member’s death, so you should check the laws of your state.Dissolution. Your agreement should tell how the business can be dissolved in the future. This is called your exit strategy and each partner should consider what they want in the event that they don’t want to participate in the business anymore.
You should work with a business lawyer to make sure your LLC partnership agreement is airtight. Contact me today at [email protected] to get started drafting your agreement.
Why Start an LLC?
Individuals choose to start an LLC because it’s an easier way to form a legitimate, separate business and it provides protections for its owners.
Starting an LLC is a personal decision, but it is a popular choice because it’s easy to start and maintain.
LLCs require less paperwork to start than a traditional corporation and they are easier to manage.
In most cases, an LLC files taxes as a pass-through entity instead of as a separate corporation. This means that members can file their business taxes on their personal tax returns instead of a separate filing.
In addition to requiring less paperwork to get started, LLCs require less paperwork and work in general to keep your LLC compliant with the law.
Starting an LLC is a great choice if you want to form a more legitimate business, but don’t want the hassle of forming and keeping up with a corporation.
How Do You Become an LLC?
You can become an LLC by choosing a name for your business, filing specific documents, paying the required fees, creating an operating agreement, obtaining an EIN, and applying for any necessary permits and licenses.
A business lawyer can help you through each step of the process to make sure you are compliant with all laws and requirements. Contact me at [email protected] to get started today.
Is an LLC a Partnership?
An LLC can be a partnership with a multi-member operating agreement.
For income tax purposes, an LLC with at least two members is considered a partnership. If you don’t want to be a partnership, you must file Form 8832 and elect to be treated as a corporation.
A single member LLC isn’t a partnership, but a disregarded entity for tax purposes unless Form 8832 is filed.
To be treated as a partnership when you’re a multi-member LLC, you don’t have to do anything. A partnership is the default classification.
If you begin your LLC as a partnership and later want to change to be treated as a corporation, you can file the same Form 8832 to change your classification.
What is Partnership LLC?
A partnership LLC is any LLC with at least two members that hasn’t elected to be treated as a corporation.
A partnership LLC is the default state for any LLC with two or more members. The LLC can choose to be treated as a corporation by filing Form 8832.
When it comes to taxes, a partnership LLC follows the same rules as a traditional partnership. The LLC should file Form 1065, which is the U.S. Return of Partnership Income. Additionally, each owner will use Schedule K-1 to show their share of the LLC.
Is an LLC a Corporation?
An LLC can be a corporation if it files Form 8832 to elect to be treated as a corporation.
By default, any multi-member LLC is considered a partnership.
To be considered a corporation, the LLC should file Form 8832. The form can be filed at the startup of the LLC or at a later date when the LLC wants to change its entity type.
Once an LLC is considered a corporation, they must follow traditional corporation tax laws.
Is an LLC a C Corporation?
In order for an LLC to be a C Corporation, members must file Form 8832 to be treated as a corporation and elect to be a C Corporation that files a Form 1120 to file income taxes.
Is an LLC an S Corporation?
In order for an LLC to be an S Corporation, members must file Form 8832 that makes the business a corporation and then choose to be treated as an S Corporation and file Form 1120S for income taxes.
Is it Better to be an LLC or an S Corporation?
Whether it is better to be an LLC or an S Corporation is a personal decision that varies based on your own unique circumstances.
LLCs and S Corps have many things in common:
Both have limited liability protection for its ownersBoth are separate legal entitiesBoth are usually pass through tax entities, but an S Corp has to file a business tax return in all cases.Both have to follow certain state requirements upon formation and ongoing throughout the life of the business.
While there are several similarities between an LLC vs an S Corporation, there are also big differences that should be considered.
S corps can have no more than 100 owners/shareholders while an LLC is unlimited. Additionally, S corps require that owners be U.S. citizens while non-U.S. citizens can be in an LLC.
S corporations may not be owned by other corporations, LLCs, partnerships, and most trusts. LLCs do not have the same limitations. LLCs are also allowed to have unrestricted subsidiaries.
LLCs can have owners manage the LLC or elect to have managers manage the LLC. If the LLC is member managed, it operates a lot like a partnership. If it is manager managed, owners aren’t involved in day to day decisions.
S Corporations have officers and directors while LLCs do not. The board of directors in an S Corp oversees the business and handles major decisions. The officers, who are elected by the board, manage daily business activities.
Some states require that LLCs “expire” – with a dissolution date listed on their formation documents. Additionally, if a member dies or leaves the LLC, the LLC may be required to dissolve in certain states.
LLC ownership can’t transfer freely without the approval from other members. While S Corps can freely transfer stock as long as it meets the IRS restrictions.
An S Corp may have a better self-employment tax situation because an owner can be treated as an employee and earn a salary.
FICA taxes are paid on the salary amount and any additional corporate earnings could be treated as unearned income, thus avoiding self-employment taxes.
If you need help choosing between an LLC and an S Corporation, email me at [email protected] for assistance.
Tax Benefits of an LLC
In most cases, the tax benefit of an LLC is that it’s a pass-through entity for taxation purposes. An LLC isn’t taxed at the corporate level, which means it avoids double taxation.
This means that you don’t have to file a separate business income tax return, which allows the income from the business to be taxed only at the personal level.
Another tax benefit of an LLC is that members can claim their own share of loss from the business on their income taxes – something that comes in handy in the startup years.
What is the Best Tax Classification for an LLC?
The best tax classification for an LLC depends on your own circumstances. There are four options: disregarded entity, partnership, C Corporation, and S Corporation.
In many cases, the best option is to form an LLC and elect to be treated as an S Corporation for taxation purposes.
Here are the benefits of forming an LLC and choosing S Corp tax classification:
Legally, your business will be an LLC and enjoy the ease and flexibility that an LLC brings – without the corporate headaches.You’ll enjoy pass-through income and avoid double taxation.The IRS will treat your business as a corporation, which means that you and other owners can enjoy salaries and wages as well as dividends that aren’t subject to SECA taxes.
How Do You File Taxes for an LLC?
LLCs file taxes using their own personal tax returns because an LLC is considered a pass-through entity for tax purposes.
If you’re a single member LLC, you file taxes the same way a sole proprietor does – using Schedule C and your 1040.
If you have more than one member, you’ll likely be taxes as a partnership. This means that each owner pays for their share using Schedule E and their 1040. Additionally, the LLC has to file a Form 1065 with the IRS.
Form 1065 is considered just an informational return. The IRS uses it to be sure that all members are reporting their income correctly. Each member also gets a Schedule K-1 that breaks down their share of profit and loss.
If the LLC elects to be treated as a corporation for taxation purposes, first it has to file Form 8832 and elect corporate tax treatment.
The LLC will then file a tax return as if it were a corporation.
Do LLCs File Federal Tax Returns?
LLCs must file federal tax returns if it chose to be treated as a corporation for tax purposes by filing Form 8832.
If the LLC isn’t treated as a corporation, the LLC itself doesn’t file a tax return. Instead, each member must file a return claiming their share of the profits and losses.
What Type of Tax Return Does an LLC File?
An LLC only files a tax return if it elects to be treated as a corporation. If it chooses a C Corporation election, it files form 1120. If it chooses S Corporation election, it files form 1120S.
If the LLC isn’t treated as a corporation, it doesn’t file taxes. The tax responsibility falls on each of the owners of the LLC and taxes are filed at the personal level.
What is a Disregarded Entity for Tax Purposes?
A disregarded entity is a business entity that is not recognized as separate from its owner, resulting in the entity not filing a separate tax return.
Do I Need an LLC for My Rental Property?
You may need an LLC for your rental property if you’d like to protect your personal assets.
More than anything, whether or not you need an LLC for a rental property is a personal choice and one that should be made with the help of a professional.
An LLC is a good choice because it protects your personal assets and it’s pretty easy to startup and maintain.
On the other hand, you could simply just get a dwelling policy added to your insurance that would do the same thing with an umbrella policy for extra assurance.
If you’re considering an LLC for your rental property, email me at [email protected] and we can discuss the pros and cons of this decision.
How Do I Transfer a Property to an LLC?
To transfer a property to an LLC, you should follow the following steps:
Contact your lender if there’s a mortgage involved.Form an LLC if you don’t have one already.Obtain an EIN for the LLC and open a bank account in the LLC’s name if you haven’t already.Obtain and fill out a deed from or have an attorney draw up a deed for you.Sign the deed as the guarantor to transfer the property to the LLC.Record the deed by submitting it to your county’s registrar.If it’s a rental property, change your lease to reflect that the LLC owns the property and not you personally.
Transferring a Property with a Mortgage
If you have an existing mortgage on the property, the mortgage doesn’t transfer to the LLC. Instead, the title does and you are still personally responsible for the mortgage.
You shouldn’t try to transfer a property with a mortgage without checking with your lender because some have a due on sale clause that requires the full mortgage payment upon transfer.
Obtaining a Deed
There are two types of deeds: quitclaim and warranty deeds. In most cases, when you purchase a property, you get a warranty deed.
The warranty deed states that the property has a clean title – this deed transfers to your LLC with the same guaranteed.
A quitclaim deed to transfer a title passes any interest you have to the LLC. This deed doesn’t guarantee that you own the property or that the title is good.
Changing Your Lease
After you’ve obtained and filled out a deed form and had the deed recorded, you should change your lease if you are renting the property.
Changing your lease just means that you change the wording of the document to replace your personal name and information with the information of the LLC.
The tenant’s responsibilities won’t change, but instead their payment is made to the LLC and belongs in an LLC bank account.
Can a LLC Own a House?
Yes, an LLC can own a house and other real property.
What is a Holding Company for Real Estate?
A real estate holding company is a company that owns enough stock in a separate company that it can control the management and policies of that company.
The holding company must own voting stock in the other company. In some cases, the holding company can own all of the voting stock, in which case makes a business a wholly owned subsidiary.
A holding company can be a corporation, a limited partnership, or an LLC and it exists only for the purpose of controlling another company. The other company can also be a corporation, LLC, or a limited partnership.
The holding company can own any asset – trademarks, patents, stocks, real estate, and other assets.
What is a Real Estate Investment Company?
A real estate investment company is a company that invests in real estate. Often, it’s to sale or rent out the properties to produce wealth.
An LLC can be formed as a real estate investment company to give you additional protection from the investment company’s future debts and liabilities.
Can I start an LLC on H1B?
You can start an LLC on H1B visa. There is a common misconception that you could start an LLC on an H1B, but not work for your business, but the USCIS cleared this up in 2010.
The memorandum in January of 2010 stated that you could start a business and work for it even if you were an H1B holder.
However, there are certain requirements that must be in place in order for an H1B holder to start a business and participate in it. These are:
The owner and H1B holder must be able to be hired, fired, and paid by the business. This means that the owner has to be treated as an employee.H1B holders can’t be sole proprietors.The company can’t be started just to help the owner secure an H1B visa.The position requires a bachelor’s degree or higher.The company has a business plan that specifies it will try to hire qualified American workers.In order to be a self-employed beneficiary as an H1B visa holder, a separate entity has to petition on your behalf.
How to Start a Business When You Have H1B Status
Starting a business with your H1B is very similar to the process of starting a business as a U.S. citizen. Here are the steps:
Write a business plan.Meet with a business lawyer to determine what business structure is right for you.Name and register your business.Obtain a TIN and an EIN.Lease a space for the business if needed.Obtain any needed permits, licenses, and certifications.
If you are ready to start your own business and have an H1B visa, email me at [email protected]. This is not something you want to try to figure out alone because there is intense scrutiny from the USCIS on H1B businesses.
Where Should I Open up an LLC?
In most cases, you should open up an LLC in the state you live in.
An LLC can be opened in any state, but there are additional fees and paperwork to do so. Your LLC will be considered a foreign entity, which makes things a little more complicated.
You should only open up an LLC in a different state if the benefits outweigh the disadvantages. In most cases, you want to have at least 5 members and choose a state that is very business friendly in terms of taxes and regulations.
Delaware is considered the best option for opening up an LLC because it is very business friendly and has a dedicated court to handle business matters.
How Do I Create an LLC?
You can create an LLC by choosing a name for your business, filing the operating documents, paying any required fees, drafting an operating agreement, obtaining an EIN, and applying for any needed permits and licenses.
To look at all the steps in further detail, read my article, Why Form an LLC?
How Do You Start a LLC Company?
To start a LLC company, you name your business, file certain documents and pay applicable fees, create an operating agreement, get an EIN, and apply for permits and licenses as needed.
Can You Have Employees in an LLC?
Yes, you can have employees in an LLC.
How Much Does an LLC Cost in California?
To be an LLC in California, you must pay a $70 filing fee and a service fee that ranges anywhere from $500 to $800.
How Much Does LLC Cost in Florida?
To be an LLC in Florida, you must pay a $125 filing fee and a service fee.
How Much Does LLC Cost in Delaware?
To be an LLC in Delaware, you must pay a $90 filing fee and a service fee. There is an additional optional $50 fee to expedite your application.
How Much Does LLC Cost in New York?
To be an LLC in New York, you must pay a $200 filing fee and two different newspaper’s publishing fees.
New York requires any LLC to publish a notice about the formation of the LLC or a copy of the articles of organization in the newspaper within 120 days of forming the LLC.
The newspaper must be in the same county as the LLC and be designated by the county clerk.
You’ll need a fee for filing the Certificate of Publication, which is $50 payable to the New York State Department, and then the publishing fees for the two newspapers.
Sam Mollaei, Esq., Business Lawyer
There is a lot you should know as you consider forming an LLC and even after you’ve formed one so you keep everything legal and compliant.
You don’t have to figure it all out alone. Instead, email me at [email protected] and I’ll help you with your LLC no matter if you’re just deciding between entities or already have an LLC formed.