Should You Create an LLC For Your North Bay Business?
Every company is unique; your local coffee shop is organized differently than a multinational corporation. If you are planning to open a business, it’s essential to understand your financial options.
Business entities are legal classifications that define companies. The business entity that is right for you will depend on the size of your company, the number of employees, and the tax structure that will best support you.
Many small businesses are LLCs, a nimble designation that allows great variety in how they are set up.
Maybe you’ve worked as an independent contractor and are looking for a tax break, or perhaps you’re planning to open a store in your town square? In either of these cases, an LLC could benefit your business.
What is an LLC?
LLC stands for “Limited Liability Company.” While this structure is not technically a corporation, people often colloquially include LLCs when discussing incorporation. LLCs provide some of the same benefits as S-Corps, C-Corps, and partnerships while providing greater flexibility for owners.
The owners of an LLC are known as “members.” LLCs owned by an individual are called “Single-Member LLCs.” If two or more people have ownership, it is a “Multi-Member LLC.”
Limited Liability Companies do not have any ownership requirements. There are no residency or citizenship constraints, so foreign nationals can have ownership in LLCs.
Even corporations can be members in an LLC – as well as other LLCs. A corporate entity can be one of several partners or even the sole member. However, if a corporation or other LLC is the only member, they will be treated as a partnership or Multi-Member LLC by the IRS.
LLCs are established at the state level, and the process is simple. They can be created online by an owner in a matter of minutes.
LLCs are more straightforward to operate than corporations. You do not need a board of directors or officers, nor do you need to hold shareholder meetings. Many of the administrative tasks necessary for maintaining a corporation are not required for a Limited Liability Company.
Businesses of many types can be run as LLCs. They are the most common legal entity used in buying and renting commercial property. Many independent contractors – such as artists, actors, and personal trainers – also find it beneficial to transition their business to an LLC.
Some professionals, like graphic designers, find that clients take them more seriously when working under the name of a company rather than using only their name. Creating an LLC allows a designer to market themselves as a business, making them appear more established in their field.
Imagine you are hiring a web developer to redesign your website. Which candidate would be more attractive to you: “John Doe” or “John Doe Designs, LLC?”
If you are thinking of opening a business (or currently run one) as a sole proprietor, you may want to consider forming an LLC.
What Does an LLC Do?
The primary function of an LLC is right in the name: limited liability.
The owner (or owners) of an LLC is not personally liable for debts incurred by the business or any lawsuits against the company. Creditors and trustees cannot claim your personal assets (like bank accounts, your home, or your car) if your business enters bankruptcy or is sued.
An LLC is also a very flexible way to structure your business. There is no minimum or maximum owner requirement; your company may have one owner or over 100. A member, or several members, can be designated as managers to run daily operations, or nonmembers can be brought in as managers.
LLCs are often “pass-through” organizations, meaning that the company itself is not taxed. Instead, members divide profits and losses and report them as taxable income on their annual filings. This protects the company from corporate taxes.
Other pass-through entities include sole proprietorships, partnerships, and S-Corps.
The Tax Cuts and Jobs Act created a pass-through tax deduction that is scheduled to continue through 2025. This income tax deduction will save members up to 20% of the net business income earned by their pass-through entity.
However, not all LLCs choose to act as pass-through entities. If the members so choose, they can have their LLC treated as an S-Corp for tax purposes.
Both Single-Member and Multi-Member LLCs can elect to use a corporate tax structure, however there must be under 100 members and they all must be United States residents.
In this case, the LLC will file a corporate tax return. They will be treated as a pass-through entity by the IRS, but pay taxes to the state of California.
Members may find that the taxation structure of an S-Corp is more beneficial for their business. If you and your fellow members believe this arrangement will benefit you, it is best to elect for this tax structure when the LLC is first established. This will minimize complications with the IRS and state agencies.
What Are the Disadvantages of Creating An LLC?
Not all businesses should become LLCs. While it is an agile way to structure a company, it is not suitable for every situation and every owner.
Creating and maintaining an LLC is more expensive than operating as a sole proprietorship or partnership. You will have to pay a filing fee to establish your Limited Liability Company, plus annual fees and taxes.
In California, some of these fees include:
- Name Reservation Request: $10
- Articles of Organization: $70
- Statement of Information: $20
- Franchise Tax: $800 annually
- Hiring a Registered Agent: $50 to $500 annually
Additionally, LLCs in CA must pay an additional fee if their gross income is above $250,000. Businesses that make between $250,000 and $500,000 annually will owe and additional $900, with higher fees for higher earnings. This is called a gross receipts tax.
The gross receipts tax is not applicable if the LLC is using a corporate tax structure. Only entities which are “treated” as an LLC pay this tax.
If you plan to bring in outside investors, an LLC may not be suitable for your business. Owners who wish to raise capital are likely better off forming a corporation. Stocks can be exchanged for investment in a corporation, unlike in an LLC.
Some businesses cannot operate as LLCs. Financial companies, like banks and insurance agencies, cannot file as an LLC.
California has further restrictions. In many states, licensed professionals can choose to form a Professional LLC (PLLC), but this designation does not exist in California. Doctors, counselors, veterinarians, architects, and more cannot create LLCs for their businesses in California.
As mentioned earlier, business entities are quickly established but not so easily dissolved. While a member can leave an LLC without much difficulty in California, closing the company is more complicated.
Closing your business will not automatically close your LLC, and it is vital to follow all the necessary legal steps to avoid financial repercussions down the line.
You should not create a business entity on a whim or because preliminary internet research makes it look attractive. It is always best to discuss these options with an accountant or certified financial planner before making any decisions.
Understanding Your Business Entity Options in Corte Madera
Whether you are a sole proprietor who is thinking about changing the way your business is run or an entrepreneur who is about to open a company, you should seek an expert’s opinion before starting a new business entity.
For 17 years, ProActive Tax Solutions has helped Marin County residents with their finances. Click here to schedule your free consultation and see how ProActive Tax Solutions can save you time and money.