The primary reason for establishing an LLC is for protection from personal exposure to litigation arising from the operation of your trade or business. To determine if an LLC is the appropriate entity for your business you should consider many variables such as ownership, taxes and how you would like to allocate and distribute profits and losses. These decisions are usually best suited to be conducted with a Certified Public Accountant and/or an attorney. Garris and Company can help you determine if an LLC is a viable choice for your next business venture.
An LLC is a creation of state law and, thus, not a separate tax entity, such as a partnership or corporation. An LLC defaults to being taxed as a partnership unless an election is filed with the IRS to be taxed as an S corporation or C corporation. Absent an S or C corporation election, the LLC must file a Form 1065 (U.S. Return of Partnership Income) to report its profits and losses. The members (owners) receive a Form K-1 from the partnership detailing their pro-rata share of profits, losses and other tax attributes which are ultimately reported at the individual level. If the LLC has only one member it is considered a disregarded entity for tax purposes and is treated as a sole proprietorship which files a Schedule C attached to the individual’s Form 1040.
An operating agreement is an understanding among members of an LLC regarding their rights and duties, ownership and allocation of profits and losses. It should also detail procedures to be followed for departing members, admitting new members and other various issues applicable to the operation of the company. The Operating Agreement can be amended by the LLC members at any time.