Posted by Dennis Jao

LLC Formation and Payroll

LLC Formation and Payroll

What is an LLC?

An LLC (a limited liability company) is a business structure that protects limited liability and transfers taxes. As in the case of corporations, LLC legally exists as an entity separate from its owners. Therefore, owners cannot be held personally liable for debts and business debts.

LLC allows for pass-through taxes, as its income is not taxed at the entity level; however, a tax return must be completed for the LLC if the LLC has multiple owners. As stated in this return, the LLC's income or loss is passed on to the owner. The owners, also named members, must declare their income or loss on their tax returns and pay the necessary taxes.

The benefits of forming an LLC

Starting an LLC, rather than operating as a single corporation or a general partnership or forming a corporation, usually outweighs the perceived disadvantages.

  • Flexible membership: members can be individuals, partnerships, funds, or companies, and there is no limit to the number of members. 

  • Increased Credibility: Starting an LLC can help a new business build credibility, more so than if it were run as a single business or partnership.

  • Limited compliance requirements: Unlike general corporations, sole proprietorships, or corporations (whether subject to tax, such as an S Corp or C Corp), LLCs face few state-imposed compliance obligations and continuing formalities.

  • Limited Liability: Members (as owners of an LLC) are protected from personal liability for the LLC actions and other members' actions. Creditors cannot track the personal assets (house, savings accounts, etc.) of owners to pay off business debts. The personal assets of shareholders and individual owners, in general, can be compared to the debts of the company. Note: An LLC (as well as a corporation) may lose its limited liability. This is called "breaking the veil." 

  • Management: Members can manage the LLC or choose a management group to do so. Companies, on the other hand, are managed by a board of directors, not by shareholders.

  • Pass-Through Taxation: LLCs generally do not pay tax at the entity level. Any business loss or profit is "passed on" to the owners and reported in personal tax returns. All fees due are paid individually. 

Disadvantages of setting up an LLC

There are also some drawbacks to creating an LLC, although in many cases, the advantages outweigh the disadvantages.

  • Cost: An LLC generally costs more for training and maintenance than a sole proprietorship or general partnership. States charge fees for initial training. Many states also impose ongoing rates, such as annual reports and/or deductible tax rates. 

  • Transferable property: Ownership of an LLC is generally more difficult to transfer than a corporation. Within companies, the company can sell shares to increase ownership, and if there is no shareholders' agreement, on the contrary, shareholders can sell their shares to someone else. As a general rule, with LLCs, unless members have agreed otherwise, all members must approve the addition of new members or changes in the ownership percentages of existing members.


HOW TO FORM AN LLC

While it is generally easier to incorporate than a corporation, there are some administrative and compliance tasks. To help you successfully create an LLC and comply with state law, follow these steps.

Choose the state in which to create your LLC

While you can choose to form an LLC in any state, even if the LLC does not operate there, most LLC owners choose to form an LLC in the state where they intend to do business, which in many cases is the state in which they live. One reason is that if the LLC is incorporated in a state where it does not operate, the LLC will need to register as a foreign LLC (also known as foreign qualified) to carry out business in the state where it operates can increase administrative and training costs. 

It's important to note that cost, tax, and LLC laws vary from state to state, making some states more beneficial for small business owners.

Choose a name for your LLC.

To form an LLC, you will need to choose a name that does not appear in the Secretary of State's records, such as the name of another LLC or other national or qualified corporation. Many individual owners operate under the "Do Business As" (DBA) brand or trade name and may want to use it as the legal name. To make sure the availability of the name you want for your LLC, whether it is registered as a DBA or not, you should perform an LLC name search to determine if the desired name is available. If you are not ready to submit your LLC training document, it is good to reserve your name. Many states allow you to do this for a small fee and a short period.

It's also a good idea to do a trademark search for the name you want to avoid infringing on intellectual property or misleading your customers. 

Choose a Registered Agent.

When you create an LLC or register an existing LLC to do business in a foreign state, you must employ the services of a registered agent in the state of training or qualification. Many new entrepreneurs are not familiar with the term registered agent or are unfamiliar with a registered agent's function.

A registered agent, also known as a processing agent service, receives legal advice and important tax documents on behalf of an LLC. This includes important legal documents, notifications, and communications sent by the Secretary of State, such as annual reports or returns, and tax documents sent by the state tax administration. A registered agent must also be ready to receive processing services, sometimes called notice of dispute. These are legal documents, typically a subpoena and complaint, notifying that a lawsuit has been filed against the LLC. Other court documents, such as payment orders and subpoenas, are also given to the registered agent. 

While the owner(s) of an LLC can choose to act as a registered agent for the LLC, there are several compelling reasons why business owners, even minors, choose a registered agent service provider to meet this important requirement. Among several other functions, if the registered agent is not available at the time of delivering these urgent documents or if the person receiving them is handling them incorrectly, it can cause serious problems for the LLC. The registered agent must also have a valid physical address and cannot use a mailbox.

Prepare an LLC Operating Agreement

An LLC operating agreement is required in almost all states. In most states, this can be oral, and it is recommended that every LLC have a written operating agreement. This is an agreement between the members and the LLC and the member (s) on how the LLC will be managed. Even if you are the only member of the LLC, it is important to have an operational agreement. This shows that you respect the separate existence of the LLC and may help you avoid breaking the veil, it gives you the flexibility to write down what you want to happen under certain circumstances, such as not being in able to run the business, and allows you to waive certain predetermined provisions of LLC status that you do not want the LLC to govern. 

Multi-member LLCs must have a well-written operating agreement. This document will clearly explain the division of property, labor, and earnings and often avoids conflicts between owners. It should specify, among other things, who has the power to do what, what vote is required to approve certain transactions, how members' interests can be transferred, how new members can be added, how distributions and profits will be shared well as losses and more. Your lawyer should check the operating contract to ensure that all the bases are covered.

Register your LLC in your state.

For your new LLC to officially exist, you must submit your LLC formation documents (also known as Certificate of Organization, Certificate of Incorporation, or Articles of Organization) to the Secretary of State or any department which manages the commercial files in the state. Filing fees vary across the United States. 

Once approved and submitted, the state will issue a certificate or other confirmation document. The certificate serves as legal proof of LLC status and can be used to open a business bank account, obtain an EIN, etc. Some states may also demand that you publish a notice, usually in a local newspaper, to confirm the LLC formation.

Get an EIN

After establishing an LLC entity, you will need to apply to the IRS for an EIN (Employer Identification Number). This is the identification number that your LLC will use on all of your bank accounts and your tax and business returns. Additionally, in each state where the LLC will operate, you must apply for a sales tax identification number and register with the state department of labor.

Open A Corporate Bank Account

This might not be considered a legal requirement, but it is a major good practice for anyone starting an LLC. Separating personal and business finances are essential. This is one of the main factors that courts consider when deciding to go beyond the LLC veil and hold the member liable for the LLC's debts. Most banks require business information, such as date of establishment, type of business, and owners' names and addresses. Contact your bank for the conditions before opening an account.

Register with other states (if necessary)

If the LLC you have created intends to do business outside the formation state, you will need to qualify as a foreign national in each "foreign" state. This usually requires an authorization request from the Secretary of State. A certificate of conformity is also often required. Also, an LLC will have to appoint a registered agent.

Many factors are used to determine whether a business operates in one state or needs foreign qualification.

Remember that different states have different criteria. To determine if your LLC requires foreign qualifications in a particular state, it is best to seek an attorney's advice.


LLC AND PAYROLL

Small business owners can form a limited liability company. This organizational distinction allows the transfer of profits from businesses to their owners without double taxation of profits and payments to businesses. This situation gives owners the same guarantees of liability as shareholders of a company. Their assets are not at risk if the company is unable to pay its debts. While this is generally the best strategy for the organization, it does come with some drawbacks for LLC owners in terms of compensation.

Owners' wages

Owners who pay themselves regularly do not have to treat these payments as payroll expenses, deducting payroll taxes as part of the payroll system. Instead, these payments should be classified as guaranteed payments and paid directly to the owner as a lump sum. The owner then pays personal income tax and self-employment tax on these personal income tax returns. Guaranteed payments are considered deductible expenses for the LLC and reduce taxable income per year.

Owners' Distributions

LLC partners may also receive payments classified as cash distributions out of their income. Typically, the IRS requires that these payments be made separately from payroll and wages and are used to enable partners to claim the initial investment from the business. Because the IRS classifies this as a return on investment and not as a salary, homeowners are not liable for payroll taxes, although they must pay income tax. If the IRS determines that an LLC pays the wages of its owners using cash distributions instead of guaranteed payments, which are taxed as wages, the LCC and partners will be subject to fines and penalties for avoiding payroll taxes.

Tax Liability of Payroll Taxes

Although the LLC protects its owners from personal liability in the event of a company's bankruptcy, the IRS is not always so lenient with owners, avoiding payroll taxes. Until January 1, 2009, the IRS took action against individuals and Associates LLC owners to claim unpaid payroll taxes. Bankruptcy proceedings do not protect owners from such liability, which "passes" to the owner's personal tax over the owners' taxes. Although the IRS has withdrawn from this position, it is still possible to bill LLC owners for unpaid payroll taxes incurred at any time before the start of fiscal 2009. Payroll taxes incurred after 2009 can be reversed on the ground bankruptcy, depending on the chapter of the case and the bankruptcy judge's decision.

Use Of Payroll Services

Because LLCs don't always have the staff to deal with the complexity of payroll activities, they typically outsource the work to outsourced payroll companies. While this ruling puts most of the daily payroll deductions and other matters in the hands of third parties, the IRS still holds the LLC responsible for all unpaid payroll taxes. If the third-party incorrectly calculates employee payroll deduction or fails to collect quarterly payroll tax, LLC is liable to penalties and fines associated with unpaid payroll. LLCs are still liable for unpaid interest and fines on payroll taxes if they allow the payroll department to make payments.

Employee Income

LLC owners are responsible for managing their employees' salaries in the same way as companies with any other corporate structure. Employers are responsible for withholding tax based on employee information provided on W-4 forms and rates based on income level. In addition to withholding income tax, as of 2012, employers must withhold FICA and social security taxes, up to 5.65% of employee income. Employers must contribute 7.65% of employee wages to FICA taxes. Finally, the employer must pay, not deduct from employees' wages, 6% of the first $ 7,000 in federal unemployment tax.


CLOSING AN LLC

Under the laws of several states across the US, unless your operating agreement provides otherwise when a member wishes to leave the LLC, it is dissolved. In this case, the LLC members must meet their remaining business obligations, settle all debts, distribute the assets and profits between them, and decide whether they want to create a new LLC to continue working with the remaining members.

Your LLC operating agreement can prevent this type of sudden termination of your business, including "buy and sell" or purchase clauses, which set guidelines on what will happen when a member retires. , dies, becomes disabled, or quits.


Dennis Jao
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