Over our recent blogs we’ve talked about sole proprietors, partnerships, and C and S corporations. But what if none of those options are the right fit for your business? Limited Liability Corporations (LLCs) are another option. They offer the members – owners of LLCs are members – some liability protection. Keep reading to learn more about what makes LLCs different from the other two types of corporations we’ve talked about and if it’s the right business entity for you. Need a brief refresher before diving in? Read our blog that gives an overview of business entities or reach out to our team for personalized assistance.
What is an LLC?
An LLC is unique entity that can take on characteristics of other entities we’ve talked about. LLCs offer some protection to its members from personal responsibility for the business’ debts or liabilities, provided they did not personally guarantee the debts, like C and S corporations. Members of LLCS can be made up of individuals, corporations, partners, other LLCs, or a combination of them. There is no limit to the number of members an LLC can have, and many states also allow for “single-member” LLCs. Some businesses cannot be LLCS, such as banks and insurance companies. Check with your state’s regulations and the federal guidelines for further information.
If you’re planning to form an LLC, you’ll need to register with your state. Typically, this is done with an article of organization – but it may differ by state. In Virginia, registration for LLCs is overseen by the State Corporation Commission and all the forms you would need can be found on the SCC website. If you are unsure which forms you’d need, we would recommend that you speak with your attorney for clarification.
Changing your mind
As an LLC, you have a few options open to you as to how the business will be taxed since LLCs are “disregarded entities”. By default, an LLC is taxed as a partnership if there is more than one member or as a sole proprietor if there is only one member. You can though elect to be taxed as a C corporation by filing an 8832 form. However, once you file to be a C corporation the business must follow the regulations of being a C corporation. Then, once taxed and acting as a C corporation the business can elect to be an S corporation – following the regulations of operation as an S corporation.
The benefit of this process is that LLCs that are treated as either C or S corporation if the members chose. It requires additional filings to meet registration requirements, but then you experience the benefits of being a corporation with the liability protection. If business starts to take a downward turn and you find it best to operate as the LLC’s default classification, say a sole proprietor in the case of a single member LLC, you can relinquish the election to be taxed as a C or S Corporation and fall back to operating as sole proprietor. Once you fall back however, you must continue to operate as that entity for five years before you can elect to be taxed as a corporation again.
One planning point for LLC’s is if you are starting a new business or purchasing a business. LLCs cannot be a shareholder of an S-Corporation. They can be a shareholder of a C Corporation or a member of another LLC or partner of a partnership, but they may not be a shareholder of an S-Corporation. This is rarely an issue unless you want your LLC to be a holding company of other LLC’s that you wish to be S-Corporations. Then the LLC formation would not be the right formation for you.
Looking for more help?
We’re here to provide specific guidance for you and your business needs. Not sure what entity would be best for you or have questions on LLCs? Our team can work with you to find the best fit. Give us a call at (703) 912-7862, contact us or set up a meeting. Over the course of these blogs highlighting business entities, hopefully you have learned more to make the best choice for your growing business. In addition to seeking our advice, we would strongly encourage you to also speak with your company attorney. There are legal reasons why you will choose one entity over another that may have averse to tax implications. The key thing to keep in mind when selecting an entity status is to choose the status that best fits your needs and business goals.
