INFORMATION ABOUT LLC FORMATION
An LLC or Limited Liability Company is another option that is open to you, but with the new filing fees it may not be the most attractive. An LLC can be for a single owner or for multiple owners. It offers both Pass Through taxation and Limited Liability (as does a corporation). Professional Services cannot use an LLC structure, but they can use a structure known as an LLP or Limited Liability Partnership. The owner of an LLC is called a ‘member’ and you can choose one or more of your members to be (a) manager/s and run it for the rest of you. If you have a manager in the LLC, that person can bind all of the members. However, if you have not appointed a manager, then any member can bind all of the rest. You file a Schedule E with your 1040 for an LLC.
If you have a number of members, the LLC is not taxed (in this way it is more like a partnership than a Corporation) but you have to file a form 1065, which lets the IRS know how much the LLC made or lost in a given year. An interesting feature of LLC is that you can choose to have it Pass Through (losses and profits) or to be taxed like a corporation (corporations start out at a lower rate than individuals) because an LLC allows you to keep some of your money in the company for reinvestment, growth, etc. without being taxed on it. Some really bad news comes in the way of fees. You start off with $800 that is due the first quarter of your running, but then they go up substantially, which is not the case with corporations. This is in addition to the $70 Filing Fee and the fact that you must file a Ficticious Name Statement with the County Clerk, and within 30 days this must be publicized once a week for 4 weeks in a newspaper of general circulation. Based on annual income, the fees for LLCs are:
- $250,000 to $499,999 — $900
- $500,000 to $999,999 — $2,500
- $1,000,000 to $4,999,999 — $6,000
- $5,000,000 and over — $11,790
Needless to say, if you are planning to be successful, these are high fees–not to mention the $800 annual tax that is payable on or before the 15th day of the 4th month after the taxable year begins; the fee has to be paid in advance. I am often asked, “Which structure should I choose if my two options are the Subchapter S Corporation or the Limited Liability Company?” Well, the one disadvantage of the LLC as previously mentioned was the high level of fees. However, if you do not make over a million dollars a year, they are not the end of the world. As we deal with many immigration law clients, the issue is an easy one. In order to have an S Corporation, you must be a U.S. citizen or Permanent Resident [ = Green Card Holder].
The fact that you can sell shares of a C corporation makes it desirable–keep that in mind with the Subchapter S Corporation, which can’t just sell it to anybody without checking ID. This is because you could lose your status as a Subchapter S Corporation if you sell it to a foreign national. This is very different from the situation with an LLC in which a member can be a person or entity. There is no limit that I am aware of (i.e., a corporation or another LLC can be a member of your LLC). With respect to allocation (of profits and losses), with a Subchapter S, you are forced to allocate according to your proportion of ownership. With an LLC, you can allocate 90 percent of the losses to a 5 percent owner (check IRS for specific rules on this) if you have agreement from the other members. This is a significant difference where you have a member (who may be an investor) who needs significant write-offs during the start-up phase of a company. That could be you, for example, if you just received a big bonus or a severance check from your previous job and are now starting a company and want to minimize your tax bit using your write-offs.
FOR AN EXPLANATION OF STARTING A: