A Limited Liability Corporation (LLC) is a hybrid between a sole proprietorship and a corporation. So, as the owner or partner in an LLC, you are considered self-employed as you would be as a sole proprietor. In an LLC, the business itself is not taxed but its owners are. And like a corporation though, an LLC is protected from having personal assets pursued that are the result of business actions. It’s not recognized as its own entity like a Corporation is an entity however.
Each member in the LLC files their own tax forms. For a single owner, you’d file the same forms as a sole proprietor—form 1040 and Schedule C. In a partnership LLC, the partners would fill out form 1065. And should your LLC elect to go through the process to classify as a corporation, one form, 1120, would be filed for the corporation.
If deciding between an LLC and an S-Corp, know that an LLC requires much less paperwork, record-keeping and startup costs. There is also a lot more flexibility in how profits can be divided up and shared in an LLC than in an S-Corp.
A drawback to an LLC is that if you’re in a partnership and one partner leaves the LLC, the LLC is immediately dissolved. Also, each member in the LLC and the entirety of the LLC is also subject to Social Security and Medicare taxes.
Do you have the support you need to manage your small business bookkeeping?
Contact us to schedule an appointment to speak with a local small business advisor.