If you are about to start your small business, the different designations you can pick from can seem daunting. LLC, S-Corp, sole proprietorship; all of these are good options, but may not be the right fit for every situation.
For anyone looking to start a domestic LLC, there are certain procedures that must be taken during formation. There are also LLC-specific tax rules that need to be followed.
If all of this seems daunting, fear not! We’ve put together a handy guide to forming and running your domestic LLC. Read on for more!
The Basics of an LLC
LLC is an abbreviation for a limited liability company. This means that you, as the owner, are not personally responsible for the debts and liabilities of the company. LLC laws can vary from state to state.
In an LLC, the profits are passed through the taxes of the owner(s). Depending on your state regulations, this can result in lower overall taxes, which can be beneficial.
LLCs can be formed as a sole proprietorship, a partnership, or a corporation. If filing as a corporation, the business will pay federal taxes, but the business will also continue in perpetuity upon the death of the owner(s).
For LLCs that are operated by a single owner, they are automatically designated as a sole proprietorship. If multiple partners are listed as owners, it is classified as a partnership. It is still an LLC for organizational and tax purposes.
LLCs are appealing for many reasons, but one of the largest is the flexibility of management. It allows for either a single owner, a handful of partners, or even a multitude of partners spread across several states.
What Is a Domestic LLC?
There are two types of LLCs: domestic and foreign. A foreign LLC does not operate overseas, though. This actually means that it is operating in a different state from where it originally began.
Logically, this means that a domestic LLC is a business that is operating in the state it began business in. If your business expands into new states, you will have to also file with those states as a foreign LLC, but the process is similar.
Obviously, if you are just starting your business, you should be filing as a domestic LLC. You cannot file as a foreign LLC in other states without demonstrating proof of good standing in your domestic state.
If your business expands into international markets, you will have to work with an offshore service provider. There are very few countries that allow for the formation of an international LLC, so this is not generally a popular option.
Forming Your LLC
In order to begin your LLC, there are a specific set of steps that you will need to take to make sure everything is above board.
The first step is to choose a business name and register it on both the local level with a DBA and with your state’s Secretary of State office. This is necessary in order to file as a federal entity.
The next step is to write up your articles of organization. This is best done under the direction of a business lawyer.
These will include (but isn’t limited to) the business name, the primary agent, partners and/or managers, and the designation of the LLC (sole proprietorship, corporation, etc.).
Your operating agreement is another important document drawn up by a business lawyer. This will function as the backbone of your company. Some things included in these articles include things such as:
- Allocation of profits and losses among members
- Rules of dissolution
- Duties of members of the LLC
Domestic LLC Tax Forms
Depending on how you choose to incorporate your LLC, there are different forms that will need to be filed federally.
For a single-owner LLC, this will be automatically classified as a sole proprietorship for tax purposes. This means that the business is not required to pay federal taxes, or state taxes in most cases.
For a sole proprietorship LLC, you will submit any profits and losses under section C of your regular 1040 income tax form.
Co-owned LLCs are treated as partnerships for taxation purposes. Much like a sole proprietorship, the business is not liable for income taxes and passes that responsibility on to its members.
This is where your operating agreement comes in. Deciding upon individual fiscal responsibilities beforehand will make filling out your 1040 forms easier and stress-free.
Note that co-owned LLCs must also file form 1065, which is the federal form for all partnership companies.
If your LLC will need to retain a large portion of profits, it may be beneficial to file as a corporation, which might save you money on taxes. This will require filing federal form 8832, which is the form for all corporations. Corporate tax rates for profits below $75,000 are lower than individual income tax rates, so this might be worth considering.
Much like a regular corporation, you can choose to have members who contribute to the company. They can act as shareholders, managers, or both at once.
Be sure to choose your business partners and shareholders wisely. Don’t spread the profits too thin or have too many managers exerting their personal vision for your company. Be clear in your operating agreement.
If you plan on hiring employees, you will need to obtain an employer identification number (EIN) with the Internal Revenue Service. You will also need to file I-9 forms for every employee you hire.
Get Help With Your LLC Taxes
As a business owner, you will benefit from hiring a professional to handle an accountant to manage your expenses and profits.
If you are looking for experienced accountants, we have you covered. Call us at (407) 344-1012 for a consultation today!