Today we have a guest post fromJosiah Hass of JTH Legal, an Oklahoma City firm working with individuals, families and small businesses:
An LLC, or Limited Liability Company, is a popular business structure for small businesses all over the United States. As the name suggests, they provide limited liability protection as well as pass-through taxation and more flexibility than corporations. These features make LLCs an attractive option for many small business owners. Here we will shed a bit of light on the common questions people have when considering an LLC.
Does an LLC provide tax benefits?
Yes, most tax pros will say an LLC has preferential tax treatment compared to a “C” Corporation. You should always consult with a CPA, but here are some basic reasons:
Avoid Double Taxation: LLCs are considered "pass-through entities" by the IRS. This means the business itself doesn't pay federal income tax on profits. Instead, the profits and losses "pass through" to the individual members' tax returns. This avoids double taxation, which occurs when a corporation pays taxes on its profits, and then shareholders pay taxes again on their dividends.
Qualified Business Income Deduction(QBI): The QBI allows eligible LLC members to deduct up to 20% of their qualified business income, which can significantly lower their taxable income.
Flexibility: In some cases, LLCs can elect to be taxed as a C corporation or S corporation, depending on which offers a better tax advantage for their specific situation. This requires filing additional paperwork with the IRS.
It's important to remember that LLCs still require owners to pay self-employment taxes (Social Security and Medicare) on their share of the profits. At times, CPAs may choose to utilize an “S Corp” tax election for an LLC to help lessen the self-employment taxes.
Do I have an LLC or an S Corp?
It’s first necessary to understand the distinction between a legal entity and a tax election. A legal entity is formed with the Secretary of State and it is your actual company that provides you liability protection and separates the business from yourself individually. A tax election is made with the IRS afteryour entity is formed on the state level.
The two most common company types are LLC and Corporation – either one of these types of entities can elect to be taxed as an S Corp.
So, if you or your CPA made an S Corp tax election for your LLC, your company entity type is still an LLC and you are taxed as an S Corp.
How does an LLC protect against creditors and litigation?
An LLC is considered a separate legal entity from its owners (called members). This means the business and your personal finances are treated differently in the eyes of the law. If the LLC faces a lawsuit or incurs debt, creditors can generally only go after the LLC to satisfy those claims. Your personal assets like your house, car, or savings account are typically shielded from liability so long as you have maintained the LLC as legally required.
Additionally, if a creditor does take a judgment against your LLC in a court case, the creditor typically only receives a “charging order” that entitles them to receive distributions that would be made from the LLC to the owners, up to the amount of the judgment. This is preferable to a judgment against corporations, where the law allows one to go after the owner’s stock in the corporation.
How much does it cost to set up an LLC?
State Filing Fees: Filing fees in Oklahoma are typically around $100 for an LLC, $25 for a dba/tradename, and $25 per year for an LLC’s annual renewal. This is very cheap compared to many states.
Registered Agent: Every LLC is required to have a registered agent, with a physical address within the state that receives legal documents on your company's behalf. You can act as your own registered agent, but it’s not recommended to use your name and home address for this. Many businesses choose to hire a registered agent service for convenience and privacy. Our firm provides this service for existing clients at no annual cost.
Beneficial Owner Filing: All LLCs are required to file this for the company and its owners/or others with significant decision-making ability. It’s free to file with the government, but can be complex. We perform these filings for clients for around $400 per LLC.
Legal Help: Hiring an attorney can simplify the LLC formation process and ensure everything is done correctly. Attorney fees for LLC formation typically start at around $1,000; and includes the formation, IRS EIN, Beneficial Owner filing, operating agreement, and detailed instructions that will help you maintain your LLC. Of course, the cost can increase depending on the complexity of your situation.
How many LLCs do I need?
In general, it's often recommended to start with one LLC unless you have a compelling reason to need more. You may consider multiple LLCs if you want to isolate the liability of certain property, or if one part of your business engages in higher risk activities. For businesses with completely different operations and risk profiles, separate LLCs can be beneficial.
If you're unsure, it's always best to consult with a business lawyer. They can help you assess your specific needs and determine the optimal LLC structure for your situation.
How do I set up an LLC?
Talk with a lawyer and CPA: Strongly recommended, but not required.
Choose a Business Name: Pick a unique and available name that complies with Oklahoma's naming guidelines. You can conduct a free business name search on the Oklahoma Secretary of State website to ensure your chosen name is available.
Appoint a Registered Agent: Every LLC needs a registered agent, which is a local person or service that accepts legal documents on behalf of the business.
File Articles of Organization: This is the core document that formally establishes your LLC with the state. You'll file it with the Secretary of State office in the state where your LLC will be registered. In Oklahoma, this can be done online.
Create an Operating Agreement: This internal document outlines the ownership structure, management rights, and profit and loss sharing for your LLC. Banks will require some form of this to open a business bank account.
Obtain an Employer Identification Number (EIN): An EIN is an IRS number used to identify your business for tax purposes. You can apply for it online through the IRS website at no cost.
File your Beneficial Ownership Information: The Corporate Transparency Act (CTA) requires all LLCs to register beneficial owners with the FinCEN website (https://fincen.gov/boi). LLCs in existence prior to January 1, 2024, have until January 1, 2025, to comply. LLCs formed January 1, 2024 or later must register within 90 days of formation. Fines and penalties can be imposed if your business is not compliant, but there are no fees associated with filing your report.
I Formed My LLC, Now What?
Create a Bank Account: Your LLC should have its own bank account and, if using a credit card, it should be in the LLC name. Never use the business accounts for personal expenses and always sign as the Member or Manager, depending on your LLC management structure.
Have Contracts/Terms of Service Reviewed: Consult with a lawyer about drafting any required contracts for customers or employees your business needs.
Maintain Records: Keep complete business records including profits, losses, agreements, contracts, loans, and assets.
Work Closely with a CPA: If you don’t already have one, consider hiring a CPA to assist you with filing taxes and taking advantage of all benefits available to your LLC.
Monitor Deadlines and Regulations: Keep track of annual filing deadlines to ensure your business remains in good standing. Monitor state and federal laws governing small businesses, including the new CTA regulations.
This information provides a general overview, but it's not a substitute for legal advice. Consulting a business attorney is highly recommended to ensure compliance with the law and to maximize the benefits of your LLC.
Josiah Hass is a business attorney located in Edmond, Oklahoma and services clients throughout Oklahoma. Josiah’s practice has focused on business and estate transactions and litigation for the last 12 years.
You can contact Josiah here to schedule a consultation.
You can also find Josiah on Instragram, Facebook, or on his company website.
****This summary provides a concise overview of limited liability companies for educational purposes only, and is not to be construed as legal advice for your specific situation. Please contact us if you have questions or need assistance.