As a small business owner you will want to form a legal entity structure to obtain limited liability protection. A popular way to obtain limited liability protection is to form a LLC to protect your personal assets from creditors, debtors, and legal claims. One of the foremost reasons for you to form an LLC is the benefit of having limited liability protection. Limited liability protection is afforded to all members of an LLC. An LLC should be operated with a complete separation of personal and business assets. One advantage of forming an LLC is that of pass through taxation status, or income flowing through the entity to the members or owners. In order to maintain the privilege of limited liability protection, the company must adhere to all local, federal, and state laws. The company must also do everything that is required to maintain a good corporate status, pay all required taxes, and file all necessary paperwork.
Before you decide if filing an LLC is right for your specific situation, you will need to learn about some of the advantages, risks, and requirements that will affect you and your business. Here are some of the advantages of forming an LLC.
Advantages of Forming an LLC
Only 1 member of a business is required to form LLC
LLC can be taxed similar to sole-proprietorship, partnership, or corporation (IRS form 8832)
LLC can have more than 75 members
Nonresidents of US can be members of LLC
Pass through taxation for LLC similar to sole-proprietorship or partnership
A Corporation can be the owner of an LLC
Should you Form an LLC to write off business expenses?
When deciding to form a LLC you will need to look at all of the options that are available to you. First is the understanding that all businesses, whether they are corporations, LLCs, sole-proprietorships, or partnerships can deduct their business expenses. You do not need to form an entity to have the benefit of deducting your expenses. Having the status of LLC or Corporation may limit your exposure to audit, but it does not provide more tax deductions compared to a sole proprietorship. For example, a sole proprietorship can deduct any legitimate business expense; such as cell phone, car miles, gas used for business travel, plane fare for business travel, etc. Check with your CPA to confirm that this is true for your specific situation.
With either a LLC or an S Corporation, all of the business profits and losses will pass-through to the owners of the business each year. When you file your personal taxes, your accountant should provide you with a K1 for your business and include the profit or loss statement within your personal income tax return. This is different from that of a c corporation because a c corporation exists as a legal and separate entity from its shareholders. The officers & directors are responsible for taxes, not the shareholders. The c-corporation is responsible for writing the government a check for all of the profits earned within the tax year. The shareholders would include on their tax returns any dividends or salary received from the business in the year, and not the specific income earned by the business.