What is a Limited Liability Company (LLC)?
An LLC is a hybrid entity that can be used as a partnership, corporation, S-corporation, or a disregarded entity. The unique quality of an LLC that it may fit to all businesses unlike a corporation.
A limited liability company has many unique characteristics, and a few of them are outlined below:
- In contrast to a general partnership, when a limited partner is unable to pay, the general partner assumes full responsibility.
- A limited liability company is different from a corporation in that it is a passthrough entity and avoids double taxation.
- In a limited liability company, each partner has a responsibility based on their investment and ownership allocation.
- The distribution of contributions determines whether each partner's basis is increased or decreased.
- Taxes are paid in the year of income earned rather than when the profit was distributed to partners.
What is the term 'piercing a corporate veil' for an LLC?
Piercing the corporate veil is a legal concept where a court disregards the distinct legal entity of an LLC or corporation. Decides to transfer the company's debts and obligations to its co-owners, members, or shareholders. Therefore, it is vital to follow the protocol stated by the states where a limited liability company is registered in order to avoid taking on the company's debts and obligations. Do not mix personal expense with business.
How do you file taxes for a limited liability company?
- A limited liability company files taxes based on how the LLC is formed, such as a disregarded entity or multi-member LLC.
- A Form 1040 filing is done by a disregarded entity, while a multi-member LLC filing Form 1065 and issuing Schedule K-1 to its members is done by a multi-member LLC.
- The members of an LLC file taxes based on their share of income and losses defined on Schedule K1.
- The U.S. version of Form 1065 Partnership Income Return must be submitted by March 15th for calendar-year partnerships. In the event that your partnership is part of a fiscal year, the due date is the 15th day of the third month after the end of your fiscal year.
- Since an LLC is a tax-free entity therefore the members of an LLC pay estimated taxes to the federeal, state and local authority in order to avoid late filing penlties. The safe harbor rule is to pay 90% of the current year, 100% of the previous year, or 110% if the AGI is over $150,000.
LLCs are opting to be taxed as Corporationsor S Corporation:
An LLC has diverse features such as being able to opt for a disregarded entity, multi-member LLC, corporation, or S corporation. Therefore, an election must be timely filed based on its selection. Time constraints must be adhered to.
- An LLC, operating as a corporation, must file Form 2553.
Form 8832 is required for LLC to be a corporation.
Every limited liability company must prepare an operating agreement
Although operating agreements are not required to submit to the state in order to form an LLC. But banks and other financial institutions may ask you to present them with information about the owners of LLC, their investments, liabilities, and obligations.
The importance of a registered agent for an LLC
Registered agent is a person or an entiry require for every entity. The registered agent of an LLC can be designated by either an owner, employee, or third-party service.A registered agent is essential for LLCs to meet legal requirements, protect their owners' privacy, and efficiently manage legal and official documents. You can serve yourself as a registered agent as an owner or officer rather than hiring a third party.
