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As an entrepreneur the biggest challenge you are faced with is to select the proper entity structure for your business. While many countries allow the typical structures of sole-proprietorship, partnership, or corporation for business ownership, in United States you have the ability to form a Limited Liability Company (LLC). All 50 states now allow the formation of LLC`s. Forming your own LLC may not be as simple as a sole-proprietorship; however, the process is much less than a corporation. Requirement from all 50 states may vary slightly from state to state however all LLC mainly require two main steps to be formed.

1) Articles of Organization – For forming a LLC you need to file Articles of Organization with Secretary of State where you want to form your LLC, and pay the required fees.

2) Operating Agreement – It is not mandatory to draft operating agreement in many states, however it is advisable. Similar to Corporate Bylaws and Partnership Agreements Operating Agreement specifies Company’s Profit Sharing structure, Ownership responsibilities and Ownership changes.

LLC is neither a corporation nor a partnership. It is a type of business ownership that combines several features of corporation and partnership. Owners of LLC are called Members and not shareholders or partners. LLC can have unlimited members and they can be individuals, corporations or other LLCs.

Here are some of advantages of forming a LLC:

Pass-through taxation – LLC are not taxed at the entity level. Profits are taxed at the member level and not at LLC level (no double taxation).

Limited liability – the owners of the LLC, called “members,” are protected from liability for acts and debts of the LLC.

Can be set up with just one person involved or, in some states, one owner which may be an entity itself.

No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct). You may also not have Minutes of Meeting requirement.

LLCs existence can be perpetual, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.

Much less administrative paperwork and recordkeeping.

Profits / Losses can be shared in different ratios compared to Membership Ratio in the LLC.

Here are some of disadvantages of forming a LLC:

Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a reasonable salary to the shareholders working in the business, can be passed through as distributions of profits and are not subject to self-employment taxes.

Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.

If more than 35% of losses can be allocated to non managers, the limited liability company may lose its ability to use the cash method of accounting.

A limited liability company which is treated as a partnership cannot take advantage of incentive stock options engage in tax-free reorganizations, or issue Section 1244 stock.

There is a lack of uniformity among limited liability company statutes. Businesses that operate in more than one state may not receive consistent treatment.

In order to be treated as a partnership, an LLC must have at least two members. An S corporation can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.

Some states do not tax partnerships but do tax limited liability companies.

Conversion of an existing business to limited liability company status could result in tax recognition on appreciated assets.

So we can define LLC as a business ownership structure that offers its owners the advantage of limited liability (like corporations) and partnership-like taxation, in which profits are passed through to the owners and taxed on their personal income tax returns.

Contact sales@globalvalueadd.com OR Call 210-248-3397, India +91-80-41633973, if you are looking for professional advisory services. GVA is not an attorney or attorney firm. GVA has partnered with NAFEP for Estate Planning services. Unless we expressly state otherwise in this post any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or other matter addressed herein.

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