As the name implies, an LLC is a business structure that provides limited liability protection from its owner(s), which are called members. By default, the LLC business structure uses “pass-through” taxation meaning it is not subject to double taxation like a C corporation, rather, the profits and losses of the business pass through to its owners who report them on their personal tax returns. Additionally, there are fewer operational requirements when compared to corporations and thus, this structure has gained popularity among new business owners.

The owners of the LLC are called members. LLCs can be “member-managed” or “manager-managed”. In a member-managed LLC, the members (owners) run the day to day operations of the business.  In a manager-managed LLC, the members (owners) relinquish the authority of the day to day operations to be performed by the manager(s). Most small businesses are member-managed LLCs.

Regardless of the type of business structure you select, there are other considerations you’ll need to make while filing which include:

1. Is the default tax structure appropriate for your LLC or should an S corporation election be made?
2. Do you need an Employer Identification Number (EIN)?
3. Who will serve as your company’s registered Agent?

There are 3 main differences between an LLC and a Corporation:

Taxation: An LLC has the greatest flexibility in regards to how it is treated for tax purposes. By default, an LLC is considered a “disregarded entity” by the IRS and is taxed like a sole proprietorship if the LLC has a single member (owner) or a partnership if the LLC has two or more members (owners). An LLC also has the option, called an “election”, to be taxed as an S corporation or C corporation.

A Corporation, by default, is subject to double taxation which means the profit of the corporation is taxed (and the taxes are paid by the corporation) and then the shareholders are taxed again when profits are distributed to the shareholders in the form of dividends. Similar to an LLC, the Corporation can elect to be treated as an S-Corporation.

Record Keeping: In general, LLCs are subject to less regulations and requirements than Corporations. Unlike a Corporation, LLC annual meeting minutes are not required by the state’s LLC statutes. 

Note: Meeting minutes are written documentation of discussions that take place during a meeting such as the names of the attendees, agenda, decision(s) made and follow up actions.

Management: The owners of the LLC are called members. LLCs can be “member-managed” or “manager-managed”. In a member-managed LLC, the members (owners) run the day to day operations of the business.  In a manager-managed LLC, the members (owners) relinquish the authority of the day to day operations to be performed by the manager(s). Most small businesses are member-managed LLCs.

Corporations must have a board of directors who are responsible for establishing policies and overseeing the business. In addition, the corporation’s daily decision making is performed by the corporation’s officers. In a small business, it is common that one or two people to be directors, officers and the shareholders of the corporation.

By default, an LLC is considered a “disregarded entity” by the IRS and is taxed like a sole proprietorship if the LLC has a single member (owner) or a partnership if the LLC has two or more members (owners). An LLC can also choose to be taxed as an S corporation or even a C corporation (discussed in a FAQ below).

Related Question: How is a Sole Proprietor taxed?

A Sole Proprietor will report all business income or losses on their personal tax return by completing Schedule C, Profit or Loss from a Business which will be submitted together with Form 1040, U.S. Individual Income Tax Return. A sole proprietor will make contributions to Social Security and Medicare which are called, “self-employment taxes” and are sometimes referred to as “SE taxes”. When the sole proprietor was an employee, his or her employer paid half of the SE taxes and the employee paid the other half which is what was deducted from your paycheck. As a sole proprietor, you are both the employer and employee and will pay the entire amount of SE taxes by yourself. Self-employment taxes are reported on Schedule SE, which you will submit along with Form 1040 and Schedule C noted above.

Above, we noted that the default tax treatment of an LLC is to be taxed as a sole proprietor (for LLCs that have a single owner) or a partnership (for LLCs with more than 1 owner). An LLC also has the option to be treated as an S corporation for tax purposes.  The legal entity will still be a LLC but the tax structure will be an S corporation. Electing to be treated as an S corporation for tax purposes is generally a tax savings strategy that should be put in place only after consulting with a competent tax accountant. In general, businesses that will have greater than $30k a year in net profit (revenue minus all expenses and deductions) should consider making an S corporation election for tax purposes. You can make this election up to 75 days after you form your LLC. Additionally, you can operate as an LLC with the default tax structure and make the S-Corporation election in a future tax year when it makes financial sense for your unique situation.

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation (a business that conducts its affairs in the U.S.A.)
• Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders (shareholders must be U.S. Citizens or resident aliens)
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations are ineligible).

An EIN is a 9 digit number assigned by the IRS and is required to be able to identify the tax account of employers and others who do not have employees. The EIN is a requirement to establish a bank account for your business. Applying for an EIN is a different process than registering your business with the state. Our services include the option to have us apply for an EIN and communicate with the IRS  on your company’s behalf.

Each state requires that businesses that are formed within the state to elect a registered agent (RA). An RA is the person or business entity that will accept service of process (lawsuit) notices, correspondence from the Secretary of State and other notifications – such as tax forms. You’ll need FileYourBusiness.Com to serve as your RA if you do not have a physical address (i.e. a PO Box), are not available every day during normal business hours (away on vacations, business trips, etc.) or simply want to avoid falling out of “good standing” with the State and risk penalties such as fines or revocations.

Your LLC must file an Annual Report with the state’s Division of Corporations each year to maintain an active status. The LLC’s first annual report is typically due between January 1^st and May 1^st of the calendar year following the year the LLC is formed. We’ll make sure your business files its Annual Report each year avoiding late fees that can be in excess of $400. We also perform other maintenance such as reinstatements, dissolutions, and registered agent changes.

Banks and Insurance Companies are not permitted to organize as an LLC.

Begin forming your LLC by completing the form above.