Back in the late 1980s, several states passed legislation allowing the formation of the limited liability company (LLC) business entity. Congress passed legislation affecting the taxation of LLCs in 1988. Now, all 50 states offer the LLC as a choice of legal business entity formation alongside the traditional C Corporation, Subchapter S Corporation, General Partnership and Limited Partnership.
Like many of the business entities, the way a LLC must be run is dictated by your state statutes. You’ll find these rules in the business organization section of your state statutes. I remember going to a seminar in the state of Florida back in the late 1990s and it was touted then that LLCs were going to blow S-Corporations out of the water for new entity selection.
Main Advantages to the LLC Form of Business Entity
Forming an LLC is much less complicated than forming a S Corp. Most states (Secretary of State) require LLCs file Articles of Organization, which ask for the business name, address, register agent and members. A register agent is merely the business' contact person for the Secretary of State. LLC members are the owners or managers of the LLCs.
Many states allow for the protection of limited liability company member shares from being attached in personal actions taken against the members. Why is this good? If you’re sued personally, any shares you own in a C or S Corp can be seized if you lose the lawsuit. Your member shares, however can’t (if your state statutes so dictate).
In effect, if you are the shareholder in a closely held corporation, you could no longer be in charge of your own business. What’s the likelihood of this happening? It all depends, I’ve never seen it happen. I think most people who file suit would rather see you stay in business so you can pay those damages. However, it’s always best to discuss these types of issues with your business attorney.
If you’re a single member LLC, the taxation of your business is very flexible, you can be taxed as a sole proprietorship, corporation or S-Corporation. Two or more member LLCs can be taxed as partnerships, corporations or S-Corporations.
Check the Box Tax Selection for LLCsIf you’re a single member LLC that wants to be taxed as a sole proprietorship, you don’t have to notify the IRS of your plans – just file a Schedule C with your Form 1040 at year-end. In accounting and taxation talk this is called a disregarded entity.
Any other type of LLC makes the taxation election on IRS Form 8832. It’s pretty easy to fill out the form. Just work your way through answering the questions on the two pages.
LLCs and Arts and Crafts BusinessesI haven’t noticed any significant decrease in S-Corporations in my client base since I attended my first LLC seminar. Although, I do operate my craft business as an LLC taxed like a sole proprietorship. I like it because in the state I am located, the annual filing fee is cheaper than the corporation annual filing fee. I still retain some limited liability and the LLC is easier to manage than a corporation is. I don’t have to have annual meetings or other reportings that are requirements in my state for a corporation.
Remember though - each business is unique and each state is different. Check out your state’s statutes, make sure you really understand them or talk to your business attorney prior to making any decision about the selection of your arts and crafts business entity.