Flexibility Unlocked: Why Selecting an LLC is Your Best Move

by Jessica Egenasi

At a glance:   

• The main takeaway: Choosing an LLC structure for your business can offer significant flexibility and protection, making it an ideal choice for many business owners. 
• Impact on your business: The business structure you choose can influence everything in your company from taxes to how much of your personal assets are at risk. 
• Next Steps: Aprio’s Tax advisors can help you leverage the benefits of an LLC, understand your state’s regulations, and select the best tax structure for your business. 

Schedule a consultation   

Starting a business can bring out a slew of emotions for business owners from feeling excited for all the new possibilities to overwhelmed with important decisions, like choosing the right business structure. While there are several business structure options, a limited liability company (LLC) continues to remain popular because it offers significant flexibility for business owners. 

In this article, we explore what an LLC structure is, the benefits, misconceptions, and how to get started.

What is the Purpose of an LLC?

An LLC is an entity structure that provides its owners (who are sometimes referred to as members) with limited liability. In essence, an LLC structure offers protection, so business owners are not personally liable for any risks that businesses are subject to, such as losses, litigation, and other business-related risks. The protection provided by an LLC structure helps to prevent any potential lawsuits or debtors from going after personal assets belonging to the LLC members.  

The rules for an LLC structure can vary by state, including laws regarding the formation process and the yearly filing fees. When looking to open an LLC it is important to understand your state’s rules on registration, filing fees, and naming conventions. 

How Flexible is an LLC?

When it comes to tax options, LLCs offer business owners the most flexibility in choosing the tax structure that is most suitable for their specific needs. One of the primary advantages of choosing an LLC structure is the ability to elect how the business should be taxed, whether that is as a sole proprietorship, partnership, S corporation, or C corporation. 

Since LLCs are classified as pass-through entities (PTEs), profits and losses can be reported directly on the individual tax returns of each member, thus potentially avoiding the double taxation that C corporations face. Additionally, LLCs benefit from a variety of deductible business expenses, which can effectively lower the taxable income for the members. As a result, this flexibility helps to ensure that business owners can strategically select a tax treatment that aligns with their financial goals, potentially optimizing tax efficiency and compliance.

What is the Biggest Misconception of LLCs?

One of the most common misconceptions about LLCs is the distinction that limited liability offers a look into how the entity is treated for tax purposes. In reality the classification of an entity as an LLC does not indicate how it will be taxed. It merely informs you that the company has limited liability. For example, when a business name ends in “Inc.” or “Corp.” it is informing you that this business is a type of corporation. In the same token, having “LLC” at the end of a company’s name does not indicate how it is taxed. 

There is no one size fits all tax treatment to an LLC, in fact, there are many factors that need to be considered when choosing the tax structure of a business, especially when it comes to federal and state income taxation. 

How are LLCs Treated for Federal Income Tax Purposes?

While electing an LLC structure does not provide insight as to how the entity is treated for tax purposes, it’s important to understand what type of member you are for federal income tax purposes. 

Single member LLC 

If an LLC is opened with a singular member, generally that is considered a single member LLC or SMLLC. Most state statutes allow for SMLLCs, but it is important to ensure this as the business is formed. A single member LLC is reported on the owner’s tax return and does not have a separate reporting requirement (disregarded entity for federal income tax purposes). It is important to note that some states do require SMLLCs to file separate state tax returns from their owner(s).

Multi-member LLC

If an LLC is formed with multiple members, it will be treated as a partnership for tax purposes. In this case the entity will need to file a 1065 and the income will be passed through to the owners. 

Although the general rule is that a singular member will be treated as an SMLLC and a multi-member LLC will be treated as a partnership, there are ways for entities to select to be treated differently for tax purposes. For example, an LLC can file Form 8832 to be treated as a C corporation for tax purposes.  An LLC can also use Form 2553 to elect to be treated as an S corp. Both the S corp and C corp tax structure will work for single member and multi-member LLCs. 

Who can open an LLC and how?

To open an LLC, you have to be 18 years or older and provide a valid social security number or tax identification number. While the basic criteria seems straightforward, the requirements may vary by state and the process can become complex, including:

1. Choosing a unique and distinguishable name for the business and designating a registered agent, which can be the business owner, an employee, or a hired agent. To be a registered agent, typically, one must be a resident of the state in which the business is registered and have a physical address to receive legal documents on behalf of the business. State statutes vary on who can or can’t be a registered agent, making it important to be familiar with the state laws that the LLC is registering within. 
2. Drafting the operating agreement to establish how profits, losses, distributions, and more will be handled throughout the life of the business. Though not legally required by some states, it is highly recommended to provide clarity and minimize potential disputes.
3. Filing articles of organization with the state provides essential information about the LLC and is the foundation of the business. This process takes time and will come with a filing fee, both of which vary by state. 
4. Applying for and receiving an Employer Identification Number (EIN) from the IRS, opening a business bank account, and obtaining necessary business licenses and permits. 

The bottom line

When making the decision to open a business it is often assumed that opting for an LLC creates a tax structure. However, that assumption is incorrect as an LLC structure simply offers its members limited liability and thus selecting a tax structure is a subsequent decision. An LLC can be a single member or disregarded entity, which would be reported on the owner’s tax return. LLC’s can also be partnerships or elect to be treated as an S corp or C corp. 

Regardless of the tax structure, it’s crucial to understand your state’s statutes to help ensure compliance with the rules surrounding the formation and operation of an LLC are met. Aprio’s Tax advisors can help leverage the benefits of an LLC, understand your state’s regulations, and select the best tax structure for your business. 

Related Articles 

• The One Big Beautiful Bill: An Overview
• Tax Distributions: What Pass-Through Entities Need to Know
• What S Corporations Actually Need to Know About Reasonable Compensation