The ABCs of the Limited Liability Business Structure and How to Form an LLC
At this year’s Latino Tax Fest from July 30 to August 1 in Las Vegas, I will have an opportunity to talk with many accounting and tax professionals from all over the U.S. and beyond. Without a doubt, working with clients who want to form an LLC will be among the subjects that enter into our conversations.
With the LLC such a popular business structure among small business owners, I want to highlight some LLC basics here for those of you who may be starting out in your profession. The information I share will lay the foundation for further discussion at Latino Tax Fest when you visit the CorpNet booth (#71), and it serves as a prequel to a presentation I’ll be giving on Wednesday, July 31 at the show. During the session at 12:55 p.m. (my colleague, Milton Turcios will present in Spanish at 11:55 a.m.), I will explain what accountants and tax advisors can and cannot do to help their clients with business entity formation and compliance.
Overview of the LLC Structure
An LLC is a formal business entity registered with the state. By providing personal liability protection, tax and management flexibility, and administrative simplicity, the Limited Liability Company business structure offers what you might consider the best of both worlds between a corporation and a sole proprietorship.
An LLC may either be a single-member LLC (one owner) or a multi-member LLC (multiple owners).
An LLC is a legal entity separate from the business owner(s). So, if someone sues the business or the company cannot pay its debts, an owner's [personal assets (e.g., home, savings accounts, car, etc.) aren't at risk. Clients should know that this doesn’t mean they can be reckless or irresponsible! If they personally do something illegal or are personally responsible that endangers or causes injury to someone else, they can lose the liability protection of their LLC.
LLC Tax Treatment Flexibility
The IRS considers an LLC a “disregarded entity” for tax purposes. In other words, by default, an LLC’s taxes will pass through to its owners. If eligible by IRS requirements, an LLC may elect for tax treatment as an S Corporation. As an S Corp, taxes still pass through to the owners’ income tax returns, but owners will only pay self-employment (Social Security and Medicare) taxes on the wages and salaries that the LLC pays them. Other business profits, which are divided among owners as distributions, are not subject self-employment taxes.
LLC Management Flexibility
Clients that have a multi-member LLC can run it as either a member-managed LLC or manager-managed LLC. The owners of a member-managed LLC not only have responsibility for important company decisions but also operational and administrative tasks. In a manager-managed LLC, the owners maintain decision-making authority but appoint one or more managers to run the business operations. If clients do not specify the form of management they want in their formation documents, most states will consider the LLC to be member-managed.
How to Form an LLC – The Basics
In most states, clients will need to file a document called “Articles of Organization” or “Certificate of Organization” and pay the required state filing fees to form an LLC. An LLC must also designate a registered agent within the state.
An Operating Agreement, although not mandatory, is essential (especially for multi-member LLCs) to ensure that all owners and managers know their roles, decision-making authority, and responsibilities in running the LLC.
Like any other business, an LLC must obtain the necessary federal, state, county, and local licenses and permits to operate legally.
How Can You Help Your Clients Form an LLC?
You must be careful to not cross the line by offering unauthorized legal advice to your clients. You can, however, deliver guidance from a tax and accounting perspective provided that you're licensed or certified to do so.
Fortunately, after clients have decided to form an LLC, you have another opportunity to provide additional value to them. Because there is no law that requires an attorney to complete or file business registration paperwork, you may take on that task on behalf of your clients. This can allow you to gain a new revenue stream for your business while making LLC formation easier and less costly for your customers. If getting into this area sounds intimidating, you can put those concerns behind you! My team and I developed the free CorpNet Partner Program to give you a simple way to offer business formation and compliance filing services in all 50 states.
I will share more about that and how to avoid crossing the legal advice line during my presentation at the 2019 Latino Tax Fest. Hope to see you there!