LLC Implications

July 22, 2006 1:38 PM

Implications of an LLC?

I'm looking to form a limited liability company as a protective structure. Basically, I own a dedicated server, currently for my personal use, but I want to rent some space out to some friends/colleagues, and also want to start a few potentially commercial websites. With all of this, I begin to get concerned about personal liability, hence the decision to file for an LLC. While it's conceivable it will become profitable, I doubt it'll ever exceed triple digits a year.

It's easy to find information on what it takes to file an LLC, and I'm familiar with the concept and process. But what I want to know is what my other 'obligations' are, such as annual paperwork requirements or whatnot. Are taxes necessarily more complex than a 1040EZ? While I'm not doing anything fraudulent or deceptive, is it easy to 'pierce the corporate veil' if my main reason for the business was to protect me in what's little more than a hobby? Basically, besides the steps to file an LLC, what do I want/need to know before I file?

posted by fogster to Work & Money (6 answers total)

I'm no expert, but my understanding of LLCs is that they have the advantage of pass-through taxation, meaning that there is no corporate income tax return to prepare --- any profits are taxed as part of your income. So no, from what I have heard the taxes are not more complex.

But that's just what I've heard/read.

Corporations are presumed to be separate entities, and the corporate veil not pierced. But there are factors used to determine that the corporation is a "sham" -- such as whether stock certificates are issued, whether stock in the corporation is issued to just one individual, whether the corporation is basically the alter-ego of one individual. These factors might be present in your case. Check with an attorney where you live --- an attorney may be able to advise you on things to do that would help you be protected by the corporate form.
posted by jayder at 2:00 PM on July 22, 2006

An LLC provides you with the same legal liability protection of a regular company. However there are certain compliance requirements you need to fulfill to keep up the legal standing of the LLC as a separate entity. If you fail to keep up with them and are sued, it is easier to shift the liability to you personally.

These requirements include include holding organizational meetings, special and annual board meetings, member meetings, shareholder meetings, minutes and resolutions of major company decisions etc. These are usually not difficult tasks as there are many free forms out there to accomplish what is needed but people often just forget or can't be bothered.

There are online companies out there who look after compliance for you. Search for - LLC compliance - for example. At your profit levels, sounds like you would be better off doing it yourself though - and it is very possible to do it all for free but you need to be diligent and do some research.
posted by vizsla at 3:27 PM on July 22, 2006

An LLC is a blending of a few different opportunities. It allows you to form a corporate entity with someone else or alone, and choose to have it taxed as a basic partnership or as a more complex corporation (S-Corp or C-Corp, actually) while still maintaining a liability shield around yourself.

Basically, an LLC allows for the flexibility of a sole proprietorship or partnership structure within the framework of limited liability, such as that granted to corporations. An advantage of an LLC over a limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations. Two examples of simplified requirements are: the lack of requirement for annual meetings of shareholders (LLCs have "members") and no requirement for bylaws. Most LLCs will, however, choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws. Note, too, that some states, such as New York, require an operating agreement.

(Source.)

There are ramifications to a business not showing some form of profit in at least three out of every five years, but these issues are covered in Hobby Loss statutes, and should provide you with more relevant information regarding a real hobby versus an actual business.
posted by disillusioned at 3:27 PM on July 22, 2006

I have incorporated before as an LLC -- and was able to take advantage of losses on my personal income taxes in the early phase of the business. There were some interesting personal taxation issues that came up after having sold the business -- all of which required the CFO of the business to work closely with my personal accountant.

Check out the following --

"Legally, a limited liability company is neither a partnership nor a corporation....an LLC combines some of the major advantages of both partnerships and corporations. An LLC provides protection from liability to the same extent as a corporation, allows members to participate directly in the management of the business without forfeiting the limited liability shield, and yet is usually taxed as a partnership. Similar to partnerships, income is only taxed once, tax attributes are passed down from the entity to its owners, the rules limiting passive losses still apply, and special allocations in the LLC operating agreement must have 'substantial economic effect.' Operating as an LLC may subject members to self-employment tax based on their participation in management. This cost should be considered when deciding which vehicle to operate a business.

Unlike partnerships, however, several state statutes allow for LLCs to consist of a single member. The 'check-the-box' regulations formally recognize the validity of a single member LLC and yet treat it as a 'non-entity' for tax purposes (i.e., as a sole proprietorship or a branch or division of the owner). The existence of a limited liability entity that is transparent for tax purposes has opened several planning opportunities. For example, multi-entity companies may be able to avoid various aspects of the consolidated return rules or, on the other hand, multi-entity companies can effectively accomplish a consolidated tax return in states which do not permit the filing of consolidated state income tax returns.

Again, as with most all cutting-edge federal rules, state law must be examined to determine whether it allows LLCs to contain just one member. California, for example, has purposefully chosen not to fully comply with the federal 'check-the-box' regulations. California continues to tax single member LLCs organized in California as a corporation unless they are formed outside of California and treated as a single-member LLC in that jurisdiction. Similar to California, many states’ laws contain a 'foreign limited liability company' provision which allows the character of an LLC of another state to be respected in spite of differences between the LLC statutes of the two states." -- more

Tax Implications of LLCs.

Incorporating Your Business -- Tax Factors to Consider.
posted by ericb at 3:28 PM on July 22, 2006

For my freelance work, I am operating as an LLC. I file Federal taxes with Form 1040 and Schedule C for the LLC income. I doubt that you could really report it on a 1040-EZ, but check with a qualified tax advisor to be sure.

You should also look into your particular state's tax and reporting requirements. Here in Texas, I file a couple of forms a year and (at my revenue level) there are no additional taxes simply because of LLC status. When I was in California and had a California LLC, I had to pay $800/year as an LLC regardless of my revenue level. It makes a difference both where you incorporate and where you operate.
posted by Robert Angelo at 3:50 PM on July 22, 2006

The above answers are accurate, but do not tell you the point that needs most emphasis: A limited liability company will NOT shield you from personal liability for your work if it is done negligently. A person who works for an LLC or a corporation can be sued in his own name - personal liability - and the LLC or corporation can also be sued.

The point of any entity providing limited liability is to protect its owners or investors from being sued for the actions of the entity's employees. An LLC will prevent you as the owner from being sued personally for the actions of ANOTHER employee. You will still be subject to personal liability arising from your own acts.

Buy liability insurance.
posted by megatherium at 4:19 PM on July 22, 2006