A limited liability company, or an LLC, is a business structure that combines the “limited liability” feature of a corporation and the “tax benefit” feature of a partnership. If you are a small business owner in your early stages of business, you need personal insulation from lawsuits and business debts. This is where an LLC comes in. LLC owners are free from personal liability exposure on company’s debts and liabilities. In other words, creditors of the company cannot reach an LLC owner’s personal assets to pay off LLC debts.
Although different business structures suit the needs of different individuals and corporations, an LLC offers several advantages over other business structures. Below are four significant benefits of forming an LLC:
1. Limited liability
The name speaks for itself. An LLC business owner benefits from limited liability, i.e., an LLC business owner is only liable for the amount that he/she invests in the company. In the event that the company fails to perform, the personal assets of the owner are safe because the creditors of the company do not have a right to reach the personal assets of the owner. The owner only risks what he/she invests.
2. Pass-through taxation
LLC incorporates a “pass-through taxation” system, which eliminates the need to file a corporate tax return. This means that profits or losses incurred in an LLC are taxed at customary tax rates, because the owners file for these amounts on their personal tax return. There is no need for a separate corporate tax return. If an LLC is owned by just one individual, the individual can report the company’s profits and losses on the personal tax return, similar to a sole proprietorship. If an LLC is owned by more than one individual, each individual is responsible to pay taxes on their share of profits, through a personal tax return.
3. Ease of formation
State law governs LLCs, and the formation of an LLC might vary within different states. In New Jersey, forming an LLC is as easy as choosing a name, appointing a registered agent, registering the business and obtaining an employee identification number (“EIN”) from the Internal Revenue Service (“IRS”). Once you decide a name for your LLC, you must do a search to ensure that the name is available in the state. The name of your company must contain the words “Limited Liability Company” or the abbreviation “LLC”. In order to register the business, the articles of organization, containing the following information, are filed with a state official, usually the Secretary of the State:
Name and address of the business
Primary purpose of the business
Name and address of the business’ registered agent
The EIN can be easily obtained online from the IRS using the following link: https://sa.www4.irs.gov/modiein/individual/index.jsp. There is no cost associated with obtaining the EIN.
4. Flexibility of Ownership
Owners of an LLC are called “members.” Most states, including New Jersey, do not impose any constraints on an LLC ownership structure. Therefore, the members of an LLC can be individuals, corporations, and even foreign entities. On one hand, an LLC can have unlimited number of members, and on the other hand, even a single member can form an LLC.
An added benefit of forming an LLC is the 2018 Tax Cuts and Jobs Act, approved by Congress on December 22, 2017. This Act gives a 20% tax deduction to qualified LLC business owners. Small business owners often find the LLC business structure very attractive and prefer an LLC to a sole proprietorship or partnership to avoid disadvantages such as profound exposure to lawsuits, ability of creditors to reach their personal assets to pay company debts, risk concerns among lenders, and difficulty in obtaining investors. If you run a solo proprietorship, you can easily convert your business structure to an LLC and gain more benefits. An LLC offers the same taxation structure as a sole proprietorship but makes it easier to protect your personal assets. It is in the best interest of every business owner to consult an attorney and determine which structure suits your business needs.
Attorney at Law; Chair of IP Group
Schumann Hanlon Margulies LLC
(T) (201) 451-1400
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