Choosing an appropriate business structure is important for many reasons. The business structure should provide flexibility in operations and limit personal liability as well. Limited Liability Companies or LLC’s are best suited for small business operations that demand flexibility in operations. LLC’s limits the personal liability of business owners like in a Corporation but offers flexibility in management as that of a general partnership or sole proprietorship. Corporations are comparatively expensive to form and operate and the procedures and formalities in its operation are quite cumbersome. Partnership and sole proprietorship offers flexibility but the proprietors and partners have unlimited liability in the business. A proprietor or partner is wholly responsible for all business transactions and obligations and their personal assets have no protection from business defaults. LLC’s provides advantage of limited personal liability and flexibility of operations.
How to form an llc depend on the state statute where you wish to register your llc. Formalities and procedures for forming an llc and operating it may vary in each state. Usually the business registrations are dealt with by the Secretary of State or Corporations commissioner’s office. Check with your state’s agency dealing with llc registrations to get proper understanding on how to form an llc. Forming llc is not difficult and does not involve many formalities so that you have to consult a professional or a lawyer. You can do it yourself if you apply some brains and effort. The general formalities and procedures for forming llc are easy and not too complicated. All states are out to attract business to their territory and will be most helpful in registering your llc.
The basic requirement in forming an llc in most states is to file an Articles of Organisation. The document will contain all the essential information regarding your proposed business. You have to select a name for your llc which is not identical or similar to that of an existing business. All states maintain a business or corporations register which you can check to ensure that the name you selected is not already in use. The name should contain the words Limited Liability Company or an abbreviation that clearly demonstrates the limited liability status of the business. The Articles of Organisation is usually available in a pre-printed format with blanks for required information. You fill in the blanks, sign as the organizer, pay the filing fees and your llc is in business. An operating agreement is advisable even if you are a single member llc. The operating agreement will provide individuality to the llc and clearly state its limited liability status.
If you are already operating a business as a sole owner and are wondering whether you need a proper legal structure for your expanding business, consider these. The recognized business structures are Sole Proprietorships, General or limited partnerships, C or S corporations and Limited Liability Companies. All these business structures have their inbuilt pros and cons. Adopting an appropriate legal structure for your business depends on many factors. The first step is to understand your business needs. If you are operating a small business without many risks or potential liabilities, a sole proprietorship is the most commonly used structure. If the business is run jointly by one or more persons, a general partnership will be suitable. Both these business structures are easy to form and operate and there are hardly any legal or statutory formalities to comply with except for employment and income tax filings.
If your business volume and activities are considerable, you need a sophisticated business structure. The Corporations (Inc.) and Limited Liability Companies (llc) are designed for conducting business with limited risks to the business owners. In a sole proprietorship or general partnership, the business owner’s personal risks are unlimited. The business owners and their personal properties are fully liable to settle business debts and obligations. Whereas, by forming a LLC or a Corporation, you limit your personal liability in business obligations. Corporations are generally used for medium or large scale businesses which involves high turnover and associated risks. Forming a corporation and maintaining it is comparatively expensive than other forms of business structure.
If you are a small business but has considerable risks or potential liabilities associated with your business forming an llc is the most appropriate thing to do. By forming an llc, you limit your personal liability for business obligations to a present amount. The legal and statutory formalities for forming an llc are simple and easy. Formation of Limited Liability Companies and Corporations are governed by state laws. The rules and regulations governing business may differ from state to state. The business registrations are usually handled by the Secretary of State’s office. You have to file an Articles of Organization stating the basic information of you and your business and pay a filing fee. Information required to be included in the Articles may vary in each state. Then you have to adopt a operating agreement for the LLC. The operating agreement helps in clearly stating the LLC’s business policies which will also provide a separate existence to the entity and the status of your limited liability. One of the best features of an LLC is the llc taxation. You can elect to be taxed as a partnership or a corporation as you wish or which is beneficial to you.
When forming an LLC remember that, an LLC is a business structure that is allowed by state statue. This means that when forming an LLC the federal government is not going to recognize the business structure for tax purposes. Since the federal government will not recognize the LLC structure for tax purposes, you will need to classify your LLC as a corporation or a partnership.
When forming an LLC corporation for federal tax purposes you can either elect to have your LLC classified as a corporation or the IRS will automatically classify your LLC as a corporation. The IRS will automatically classify your LLC as a corporation if it meets any of the entity classification rules set forth by the IRS. When you are voluntarily forming an LLC corporation you will want to file a Form 8832, this will also need to be filed when voluntarily forming an LLC partnership.
The Form 8832 is used to inform the IRS of your LLC classification, you can also use it to change your classification later. In order to form an LLC partnership you will need to have at least two members, single member LLC’s cannot form an LLC partnership. You can also have two members to form a LLC corporation, if your business is not automatically classified as an LLC corporation based on the IRS entity classification rules.
To file your taxes for a LLC partnership you will need to file a Form 1065. This form is called a U.S. Return of Partnership Income. Only one Form 1065 needs to be filed for the LLC partnership, but each owner is going to need to fill out the Schedule K-1. The Schedule K-1 is going to show each member’s share of the partnership income, which needs to be reduced by any tax that the partnership paid on the income. It will also show each partner’s share of credits and deductions
To file your taxes as a LLC corporation you will need to file Form 1120. The Form 1120 is the U.S. Corporation Income Tax Return. With the Form 1120 only one form needs to be filed, it will show all of the income and expenses for the LLC Corporation. Form 1120 does not allow for any flow-through items, which means that the members will have to file a separate income tax return for any income they received from the LLC Corporation. The only exception to this rule is if you formed an LLC S Corporation. If that is the case a Form 1120S needs to be filed instead of a Form 1120. With Form 1120S each owner reports their pro-rata share of the corporate income, credits, and deductions on a Schedule K-1, similar to the LLC partnership tax return.
In forming an LLC corporation or partnership, you can choose to do it yourself or hire a company to do it for you. In either case, one decision that you will need to make is where you want to form your LLC Corporation or partnership. Forming an LLC NJ will give you the certain tax advantages, but you can also receive other benefits. One of the benefits that you will receive for forming your LLC Corporation or partnership in NJ is the highly educated workforce that you will have to choose from.
No matter where you decide to form your LLC Corporation or partnership it is going to take time. When forming an LLC online the time it takes to get everything done can be reduced to a few days. For example, filing in person can take up to seven to ten days to get everything completed. When doing everything online you can get your LLC formed within one to three days.
Keep in mind that if you are developing a company that will have several international branches or will have services available to only one country (ie. Ehsan Bayat and his European telecommunications company) then an LLC may not be the best option. Please consult with your tax attorney or CPA.
