Limited Liability Company USA

Additional liability cover: Business Insurance

Additional liability insurance can protect your personal assets in situations where limited liability does not. For example, if you are a massage therapist and accidentally injure a client’s back, liability insurance should cover the claim. Insurance can also protect your personal assets if a court disregards your limited liability. In addition to safeguarding personal assets in such situations, insurance can also protect the LLC’s assets from litigation. However, your LLC is not protected if it fails to pay its bills and debts: commercial insurance does not normally protect personal or business assets against unpaid business debts, regardless of whether or not you have personally guaranteed them.

Taxation of an LLC

Unlike a corporation, an LLC is not treated as a separate taxable entity. The tax authority (IRS) describes it as a “pass-through entity”, meaning a tax-transparent entity that is subject to the same tax treatment as a partnership or sole proprietorship. All of the LLC’s profits and losses therefore pass through to its members, who declare them on their personal tax returns. Each LLC member must make quarterly estimated tax payments to the IRS. Although the LLC itself does not pay tax, multi-member LLCs must file Form 1065 with the IRS every year for information purposes. This form, which partnerships must also file, sets out each member’s share of the LLC’s profits or losses, enabling the IRS to check that members are correctly reporting their income on their tax returns.

Management of an LLC

The owners of most small LLCs also take part in running the business, so all of the members act for the LLC as its managers. This arrangement is known as “member management”. An alternative management structure is sometimes used – rather awkwardly called “manager management” – under which only one or more of the LLC’s members (or even a third party) are appointed to take responsibility for acting on behalf of the LLC and running it. Non-managing members (sometimes family members who have invested in the LLC) play no part in management and simply receive a share of the LLC’s profits. Members or managers acting on behalf of the LLC (“managing members”) serve as the LLC’s agents.

Registered office of an LLC – Limited Liability Company

Every LLC must have a registered office and a service address in the state in which it is formed. You can order registered office, service address and mail forwarding services when setting up your LLC or at any time afterwards via the contact form.

Share capital of an LLC – Limited Liability Company

An LLC is not required to have any minimum share capital. Unless you choose otherwise, we will set up your company with a capital of $100.

Name of an LLC – Limited Liability Company

The name of an LLC must contain the words Limited Liability Company or the abbreviation LLC.

Anonymity of LLC members – Limited Liability Company

In some US states (e.g. Delaware), the members and managers of an LLC enjoy a relatively high degree of anonymity, as they are not entered in the US business register. If you are interested in setting up an LLC and using it to acquire shares in a limited company or real estate, please send us your questions via the contact form: Question

The best state in which to form a company in the USA

The states of New York and Florida offer the best conditions for forming and running an LLC. Delaware is also a popular choice. Their advantages include low official fees and fast incorporation and document processing. Delaware charges 0% state tax on all income derived from customers in other states, although this advantage does not apply to LLCs, as an LLC is subject to neither federal nor state taxation. If you are doing business or buying property directly in the USA in one of the largest states, such as Florida, New York or California, it is better to form your LLC in the state where you carry on your activities. If you would like to find out more about doing business in the USA and about the official and tax obligations that may arise, please contact us via the contact form: Question

Forming an LLC

To form an LLC, you must file “articles of organization” (also referred to as a “certificate of organization”, “certificate of incorporation” or “certificate of formation”) with the business registry office of the US state of your choice. This office is often called the corporations division and is usually part of the office of the Secretary of State of the relevant state. Formation fees range from approximately $100 to $800. Today, an LLC can be formed with just one person in every US state. Many states provide a standard one-page form for the articles, which requires only a few basic details about the LLC, such as its name and address and the contact details of the person (usually called the “registered agent”) who accepts legal documents on the LLC’s behalf. Some US states also require a list of the names and addresses of the LLC’s members. In addition to the articles of organization, you also need to prepare a written operating agreement for the LLC. This does not have to be filed together with the articles of organization, but that does not mean you can do without it. The operating agreement is a key document, as it sets out the individual rights and obligations of the LLC’s members and their shares in the business and its profits.

Dissolution of an LLC

Under the laws of many US states, unless your operating agreement provides otherwise, the LLC is dissolved if one member wishes to leave. In that case, the LLC’s members must fulfil any outstanding business obligations, pay off all debts and divide any remaining assets and profits between themselves, and then decide whether to form a new LLC or continue the business with the remaining members. You can prevent this problem by including in the operating agreement provisions setting out general rules for when a member leaves or dies.

Taxation of an LLC in the USA

If an LLC does business within the United States – that is, it has employees or a manager in the USA, has warehouses or offices there, or rents out property in the USA – it becomes subject to US taxation. Even then, however, the LLC does not pay tax at company level, only at member level: the LLC passes its financial result, whether profit or loss, through to its member(s), who include it in their tax returns. A member may also be another legal entity. For personal income tax, individuals can claim a tax-free allowance of up to $12,000. If the LLC’s members live in the USA, they must also pay contributions of 15% of net income (self-employment tax). There are three types of tax in the USA: – federal income tax (rates from 10% to 35%) – state income tax (rates from 0% to 10%) – sales tax (rates from 0% to 10%) For individuals, the tax structure for LLC members is as follows (this does not apply to LLC members that are legal entities): 10% on income up to $8,925; 15% on income from $8,925 to $36,250; 25% on income from $36,250 to $87,850; 28% on income from $87,850 to $183,250; 33% on income from $183,250 to $398,350; 35% on income from $398,350 to $400,000; 39.6% on income over $400,000. LLC members report the LLC’s income and losses on their own tax returns. A Limited Liability Company (LLC) is not a separate taxable entity like a Ltd. or a corporation. The tax authorities (in the USA, the tax authority is called the IRS) describe it as a “pass-through entity”, i.e. a tax-transparent entity subject to the same tax treatment as a partnership or a sole proprietorship. All of the LLC’s profits and losses “pass through” the LLC to its members, who declare this income or these losses on their personal tax returns. The LLC itself therefore does not pay federal income taxes. The only quasi-tax obligation of an LLC is that, in some US states, once it starts doing business there (i.e. has offices or employees), it must pay a fixed annual charge, usually known as franchise tax or a franchise fee.

Income Taxes

Depending on the number of members, the US tax authority (the IRS mentioned above) will treat LLC members either as partners in a partnership, allocating profits and losses between them, or as a sole proprietor.

Single-owner LLCs

For tax purposes, the IRS treats a single-member LLC as though its sole member were a sole proprietor who earns all the income and incurs all the expenses directly. This means that the LLC itself does not pay tax and does not have to file a tax return with the IRS. If you are a permanent resident of the USA, hold a green card or are a US citizen, then as the sole member/owner of your LLC you must report all of the LLC’s profits (or losses) on a form called Schedule C and submit it with your tax return, which is filed on Form 1040. Even if you leave profits in the company’s bank account at the end of the year – for example, to cover future expenses or to expand the business – you must still pay income tax on that income.

Multi-owner LLCs

For tax purposes, the IRS treats a multi-owner LLC as a partnership. Like single-member LLCs, co-owned LLCs do not pay income tax themselves. Instead, each LLC member pays tax on their share of the profits on their personal income tax return, together with a form called Schedule E. Each member’s share of the LLC’s profits and losses, known as the distributive share, should be set out in the LLC’s founding agreement (the operating agreement).

Allocation of profits between LLC members.

Most operating agreements adopted by LLCs provide that a member’s share of profits and losses (distributive share) equals their percentage ownership of the business. For example, if Michal owns 60% of the LLC and Júlia owns the remaining 40%, Michal will be entitled to 60% of the LLC’s profits and losses and Júlia to 40%. However, the operating agreement may depart from this and allocate profits and losses in a way that does not match the members’ ownership interests in the LLC – this is known as a “special allocation”.

Tax on the entire distributive share.

Regardless of whether the company’s profits or losses (distributive share) are actually distributed to the members, the IRS treats every member who holds US citizenship, a green card or permanent residence in the USA as if those profits or losses had been distributed to them, for each year. This means that every LLC member with US citizenship, a green card or permanent residence in the USA must pay tax on the distributive share of the LLC’s profit allocated to them, whether or not the LLC pays out all or part of that profit to its members. In practice, this rule means that even where the members have to retain profits in the LLC – for example, to buy stock for the following year or to expand the business – each LLC member with US citizenship, a green card or permanent residence in the USA must still pay income tax for the current year on the share of the profit allocated to them.

Filing Form 1065 on the allocation of profits with the US tax authority, the IRS.

Although co-owned LLCs do not pay income taxes themselves, they must file a form called Form 1065 with the US tax authority, the IRS, every year. This form, the same one filed by a partnership, is an information return that the IRS reviews to make sure the LLC’s members are correctly reporting their income on their tax returns. The LLC must also provide each member with a Schedule K-1, which sets out in detail that member’s share of the profits and losses. Each LLC member, in turn, reports this profit and loss information on their own tax return, filed on Form 1040, together with Schedule E.

Consider opting for corporate taxation

If you regularly need to keep a substantial part of the profits in your LLC (so-called “retained earnings”), corporate taxation may be an advantageous choice. Any LLC can elect to be treated for tax purposes as a corporation (the equivalent of a limited company or joint-stock company). This is done by completing Form 8832, Entity Classification Election, ticking the box for corporate tax treatment and then sending the form to the IRS. Corporate income tax rates on the first $75,000 of a company’s taxable income are lower than the individual income tax rates that apply to most LLC owners, which can save you and your co-owners money on your overall tax bill.

Estimating and paying income taxes

LLC members are regarded as self-employed business owners rather than employees of the LLC, so they are not subject to tax withholding. Instead, each LLC member is responsible for setting aside enough money to pay tax on their share of the profits. Members must estimate how much tax they will owe for the year and make quarterly payments to the IRS (and to the relevant state tax agency, if state income tax is payable) in April, June, September and January.

Taxes paid by the self-employed (self-employment taxes)

LLC members are not employees, so no social security or Medicare contributions are deducted from their pay. Instead, most LLC owners must pay these taxes – known as “self-employment taxes” when paid by a business owner – directly to the IRS. The current rule is that any owner who works in or helps to manage the business must pay this tax on their own distributive share (their share of the profits). However, owners who are not active in the LLC – that is, those who have merely invested money but neither provide services nor take management decisions for the LLC – may be exempt from self-employment tax on their share of the profits. The rules in this area are somewhat complex, but if you are actively involved in managing or working in your LLC, you can expect to pay self-employment tax on all the LLC profits allocated to you. Every owner subject to self-employment tax reports the amount due on Schedule SE, which must be filed each year with their tax return. LLC owners (like sole proprietors and partners) pay twice as much self-employment tax as ordinary employees, because ordinary employees’ contributions are matched by their employers. (However, LLC owners may also deduct half of the total amount from their taxable income, which saves a few dollars in tax.) The self-employment tax rate for business owners for 2012 is 15.3% (13.3% until 29 February 2012) on the first $110,100 of income and 2.9% on any amount above that.

Expenses and deductions

As you probably already know, you do not have to pay income tax or self-employment tax on most of the money your company spends. You can deduct (“write off”) your legitimate business expenses from your income, which can significantly reduce the profits you need to report to the IRS. Allowable expenses include start-up costs, vehicle and travel expenses, equipment costs, and advertising and promotional costs. State taxes and fees: most states tax LLC profits in the same way as the IRS – the LLC owners pay state tax through their personal returns, while the LLC itself pays no state tax.

Additional fees in some states.

However, a few states levy a tax on the LLC based on the level of its income, in addition to the income tax borne by the owners. California, for example, imposes a tax on LLCs earning more than $250,000 a year, ranging from approximately $900 to $11,000. Annual fees in some states: in addition, some states have introduced an annual LLC fee that does not depend on income. This may be called a “franchise tax”, “annual registration fee” or “renewal fee”. In most states the fee is around $100, but California charges LLCs a “minimum franchise tax” of as much as $800 a year. Before forming an LLC, find out whether your state charges a separate LLC tax or fee. For more information, visit the website of your state’s Secretary of State, corporations division, or revenue or tax department.