If you’re looking to register your business, you may be a bit confused on what type of tax status you should choose. While obviously this may differ from person to person/business to business, for the most part, I believe that choosing an LLC, or Limited Liability Company is possibly the best bet.


So what is an LLC? A Limited Liability Company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. This means that as an owner, you have a layer of legal protection – legally, you are a different entity than your business.


LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. (The owners of an LLC are referred to as “members.” — Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations, or other LLCs.) LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.


The federal government does not recognize an LLC as a business entity for taxation purposes, all LLCs must file as a corporation, partnership, or sole proprietorship tax return. Certain LLCs are automatically classified and taxed as a corporation by federal tax law. LLCs that are not automatically classified as a corporation can choose their business entity classification. To elect a classification, an LLC must file Form 8832. This form is also used if an LLC wishes to change its classification status.

THE FOLLOWING ARE A FEW ADVANTAGES OF REGISTERING YOUR BUSINESS AS AN LLC:

Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability – members are not necessarily shielded from wrongful acts, including those of their employees.


Less Record keeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.


Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.

THE FOLLOWING ARE A FEW DISADVANTAGES OF REGISTERING AS AN LLC.

Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.

Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.