Many would not dispute the fact that being self-employed is both an exciting and exhausting experience. Not only does owning a business include choosing the type of entity, but it also demands the understanding of how to pursue the legal and tax requirements. Additionally, some people may consider limiting their liability for business debts and claims. At this point, these individuals should regard forming a Limited Liability Company (LLC).
In general, LLCs are legal entities that protect a person from their liability in a lawsuit. As an example, Mancuso(2019) claims that “if the business owes money or faces a lawsuit, the assets of the business itself are at risk but usually not the personal assets of the LLC owners” (p. 4). Perhaps, as an uncommon alternative to doing business, the LLC has its benefits. Extensible management arrangement, distribution of profits and losses, limited liability rate, and profits through taxation of a company at special rates are some of those advantages.
The IRS considers an LCC as either a sole proprietorship or a general partnership, depending on the number of members. For instance, Schedule C in Form 1040 (see Appendix A) is used when an owner reports an income and revenues of the member’s tax returns of a single-member LLC taxed as if it is a sole proprietorship. The person then enters the profits and losses in the income section. A multi-member LLC’s, taxed as a partnership, earnings will be passed through to every member and summarized on their tax returns. This LLC files Form 1065 (see Appendix), which details all of the partnership’s revenue and expenses. In this case, Schedule K in this form is issued to every member of the LLC. There is an alternative; an LLC might be taxed as a corporation. Corporate taxation may be taken because of the intention to leave a substantial amount of capital or the greater profits that the employees are not supposed to make.
When regarding limiting liability for business obligations and claims, some business owners should consider forming an LLC. It is a unique alternative to traditional ways of doing business with its assets. The capability of limiting a liability rate, flexible management structures, and the distribution of losses and profits exemplify this the best. A corporation, a partnership, and a sole proprietorship classification might be elected in Form 8832 (see Appendix). In addition, numerous ways of filing the LLC’s tax returns might well be determined.
Reference
Mancuso, A. (2019). Form your own Limited Liability Company: create an LLC in any state. Nolo Press.
Appendix
The names and links of the forms mentioned in the text: