Starting a business is a significant endeavor. The business structure you choose has numerous consequences, including the extent of your personal liability and how you’ll pay taxes. You may be thinking about forming a limited liability company (LLC). Before you file all the paperwork, here are some things you should know about starting and operating an LLC.
Definition of an LLC
An LLC is a corporate entity that combines the benefits of a corporation and a partnership. LLCs have the personal liability protections of corporations and the taxation flexibility of partnerships. An LLC can have one or multiple members.
Limited Liability Protections
One of the most attractive features of an LLC is the fact it protects members from personal liability. For example, personal assets of LLC members such as vehicles, real estate, and savings account won’t be at risk in the event of a lawsuit or bankruptcy. As a separate legal entity, the business itself will be held responsible for any debts or liabilities.
Creating an LLC means you don’t have to worry about double taxation by filing a corporate tax return. This is because LLC owners report profits and losses on their personal tax returns. In the case of a single-member LLC, taxes are handled similarly to a sole proprietorship or partnership. However, members must pay self-employment taxes for Social Security and Medicare.
Employment Identification Numbers (EIN) for LLCs
When it comes time to pay taxes for your LLC, you may or may not need an EIN. If you hire employees, have multiple members, or elect to pay taxes as a corporation, you will need to file for a federal tax ID number.