The formation of a limited liability company, or LLC, gives you as its owner personal protection from the business’s liabilities. California recognizes an LLC as an actual individual, giving it the status to be sued as one.
As long as your business has a limited liability filing, the risks you’d incur as a typical business owner are, instead, directed to the LLC. The LLC status is a title and not a specific type of business in any specific industry. Corporations, individuals and foreign interests can register an LLC for their current enterprises or for new ones in the process of formation.
Protection for personal assets
An LLC is designed to keep the liabilities of a business as solely that company’s. Unlike your personal assets, which can be seized to pay debts when owning a sole proprietorship, only business assets are at risk when owning an LLC. Be it an issue of debt or a legal action taken against your business, its LLC status keeps business liability from becoming yours personally.
Tax qualification for your LLC
The LLC formation of your business dictates its tax status. The IRS recognizes a limited liability status for corporations, partnerships and sole proprietorships. To file as an LLC partnership, business owners need at least two members. Working alone as an LLC, though possible, increases your tax rate. Corporations are taxed based on one of two statuses: Corporate revenues, for tax purposes, are deemed as either partnership or personal income.
Changing your tax status in the future
How you’re taxed is flexible and based on what you register your LLC as. The IRS grants all LLCs the right to change their own tax status. Whether from a corporation to a partnership, an Entity Classification Election 8832 form is how you refile. This form lets you update new owners and parent companies.
The tax filing status of your business can affect your bottom line from year to year. For this reason, it’s important to understand how forming an LLC will determine your taxes.