Selecting a business structure is one of the more complex decisions you make when starting a business. Establishing your business as a sole proprietorship is the simplest way to go. You record your business income and the related income taxes on your personal return each year.
However, establishing your new business or restructuring your existing business as a Limited Liability Company (LLC) could be the best option. It is regulated differently from state to state but provides flexibility.
An LLC is a business structure with one or more members (owners). Many states do not restrict membership, meaning that any individual, other company, foreign entity or even another LLC can be a member of your LLC.
An LLC has some of the advantages of a corporation and a partnership without their disadvantages.
Read More: Exploring the Different Types of Business Structures
The primary benefit is that, typically, you will not be held personally responsible for the actions of the business. Assets like your home, car and finances are protected from lawsuits and from the business’s creditors seeking repayment.
In rare cases, you could be held personally liable. This can happen because of fraud or if you fail to keep your business and personal expenditures separate.
Work with your attorney to make sure you understand the LLC regulations regarding liability.
An LLC is taxed as a partnership by default. This means that the business itself does not pay taxes. Instead, you and the other members will pay taxes on your respective portions of the profits when you file your personal tax returns each year. This can help lower the tax burden if your business takes a loss in a particular year.
As members of an LLC being taxed as a partnership, each of you would be responsible for paying a 15.3% self-employment tax on all your profits. This tax is part of the social security system (FICA and Medicare).
In the future, if you determine that being taxed as a partnership is no longer the best option for your business, you can simply file an IRS form to be taxed as a corporation.
In this situation, you would no longer pay the self-employment tax on all your profits. You would only pay social security taxes (FICA & Medicare) on your actual W-2 compensation.
Compared to starting a corporation, establishing an LLC is a relatively simple process in Iowa.
After you are registered, you will need to file a bi-annual report with the Iowa Secretary of State.
Much of this can be done without any specialized help, but we encourage you to work with your legal and tax team as you complete the steps and begin to operate your business.
When structuring or restructuring your business, it’s important to make an informed decision by researching the different structures available for small businesses. You should also bring in your legal team and your CPA to make sure you’re making the right decisions for you and your business partners.
A limited liability company (LLC) provides flexibility and protection for you and other members. You can learn more about LLCs on the IRS website.
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