Setup a U.S. LLC - Limited Liability Company

Typically LLCs are taxed like partnerships, with pass-through taxation. While multi-member LLCs must file an informational tax return, single member LLCs do not. In both cases, the profits or losses are “passed-through” the business and reported on the owners’ tax returns. Any tax due is then paid by the owners at the individual tax level.

LLCs can also elect to be taxed like corporations, where the profits of the LLC are taxed at the business level. The state income tax treatment of LLC profits and losses may or may not mirror the IRS tax treatment depending on the state.

An LLC may be managed by its members (owners) or by selected managers. If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the company decision-making process. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation’s board of directors. These managers are in charge of the affairs of the LLC.

Member-management is the normal default rule of state law. This means that if managers are not selected in the Articles of Organization LLC forms, the members will direct the affairs of the LLC.

There is no requirement specifying the maximum number of members (owners) an LLC can have. The IRS does allow one-member LLCs to qualify for pass-through tax treatment. Taxation of the one-member LLCs at the state level may be different.

Some of the benefits of an LLC include personal liability protection, tax flexibility, their easy startup process, less compliance paperwork, management flexibility, distribution flexibility, few ownership restrictions, charging orders, and the credibility they can give a business.

An LLC is owned by its members. They are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in company decision-making. A member’s ownership of an LLC is represented by membership interest, just as partners have interest in a partnership and shareholders have stock in a corporation.

There are two main types of corporations – the S-Corporation and the C-Corporation. Every corporation is considered a C corp when it is formed with the Secretary of State. The distinction is made on a federal level and processed by the IRS.

A corporation that wants to be taxed as a small business corporation will file a form with the IRS called Form 2553 and file their taxes using 1120s tax return. Corporations that do not file this form are taxed as traditional corporations and file the 1120 tax return.

A C-corporation files a corporate tax return and pays taxes on the profits. The post tax income may then be distributed to the corporation shareholders in the the form of dividends. The shareholders are then taxed on dividends, which effectively forces the ownership of a corporation to pay taxes on the same earnings twice- once at the corporate level, and then at an individual level. This is known as “double taxation.”

An S-Corporation is similar to a Limited Liability Company in the sense that the profits of the company flow directly to the shareholders. This is known as pass through taxation. The profits of the S – Corporation are distributed proportionally to share percentages.

Tax Advantages of a C-Corporation:

The corporate tax rates are typically lower than personal income tax rates. Because corporate tax rates are lower, companies that have retained earnings can take advantage of the lower rates.

Limited Liability Companies (LLC)

An LLC like the S – Corporation provides for pass through taxation. An LLC is considered a disregarded entity and its tax treatment depends on the number of members. A single member LLC is taxed as sole proprietorship while an LLC with more than one member is taxed as a partnership. A very unique advantage of the LLC is that it can elect to be taxed as S-Corporations or even a C – Corporation if it chooses.

Tax Advantages of the LLC:

Multiple options in terms of taxation. Extremely flexible in how it chooses to distribute profits which allows the owners to distribute profits or losses in ways that are advantageous to their tax situation.

Typically, there are no residency or legal restrictions as to who can start an LLC. Non-residents can form a U.S. LLC and run their LLC from anywhere in the world.