Why form an LLC?

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by: Christine Johnson5
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Formation of an LLC business

The LLC formation is considered as a smart decision due to numerous benefits offered by one. Here is a short guide that will explain why forming a LLC business is beneficial. LLC formation is also considered as a preferred option to mere partnerships and sole proprietorships. It holds the features of both types and yet removes the less attractive features of both.

LLC or Limited Liability Company is a business entity that synthesizes the characteristics of the both the partnership and the corporation. This business entity is flexible offering limited liability to the owners in respect of liabilities and business activity. These kinds of companies are best suitable for the small business company which can have a single or a few business owners.

Terminology of LLC or Limited Liability Company

Above advantages help in understanding why the LLC businesses is now the most common choice. Now, to understand the LLC business more deeply, here is a list of terminologies used for the LLC.

1) Member: A Member in LLC terms is the owner of the company. There should be at least one member or owner of the LLC business. Every member of a LLC is treated as owners separate from the company rather than partners that are personally liable for company matters.

2) Membership interest: The share or interest of the owners in the company is known as membership interest and can be evidenced in membership units or percentage interests.

Advantages of LLC business:

1) A LLC is a separate business entity, which is neither treated as an incorporated entity nor as a partnership. From a tax perspective, if the LLC is owned by only one member, then the LLC is disregarded as a separate business by the Internal Revenue Service. This is good as it provides tax simplicity for the single member LLC. On the other hand, forming an LLC with numerous owners, the Internal Revenue Service taxes the LLC under the partnership tax rules which provide for a single layer of taxation. The owners can report their part in losses and profits of the LLC on their own returns, which will be taxed individually. An LLC also has the option of electing to be taxed under the corporation tax structures. The fact that it has the most tax choices over any entity and offers simple pass though taxation has increased the popularity of those filing LLC formations for their businesses.

2) Unlike the "S Corporations", which requires that shareholders of the company be citizens or permanent residents of United States alone, LLC is does not have these requirements. Any person or even entities can be owners of an LLC. Besides this, an LLC business provides substantial flexibility when it comes to management of the business. This means, LLC business can be managed by the owners or an outside person employed specially to manage the business.

3) There are LLC laws which recognized LLC businesses in every state in the United States. Hence, there is no harm or risk that an LLC formation will not provide the benefits discussed in this article.

4) Limited Liability Company offers some tax planning as well.. There is no need to allocate the losses and profit of the LLC business in the proportion of member interest. Subject to some tax restrictions, the members of the LLC may agree amongst themselves as to how to allocate LLC's losses and profits, irrespective of the relative ownership interests each member holds in the business. This area of taxation can cause issues if the rule are not met so make sure you work your accountant.

5) Operational and ordinary business expenses like employee salaries, office supplies, marketing and overhead are deductible just the same as any other business entity and can be paid through the profits of the company.

These are some of the advantages which justify the low costs for forming an LLC or converting an existing sole proprietorship into an LLC business.