Self-employment tax is owed on income generated by owners of a business.  Under the Internal Revenue Code, owners of sole proprietorships and limited liability companies under the default LLC tax rules pay self employment taxes resulting from the income generated by the business.

There is a maximum amount of income for this tax so when income reaches a certain point, then self-employment taxes will not longer be owed on the excess income. So, if your business intentions are to make more than $120,000 or so a year, it may not be worth planning for self-employment taxes and just focusing on making more revenue.  Overall, the single layer of income taxation is worth paying the self employment taxes for the initial stage of income.

The above rules apply to an LLC which is being taxed pursuant to its default tax structure which is a pass through structure.  However, after forming an LLC for a business, the limited liability company has the option of electing to be taxed as an S corporation or a C corporation.

Under an S corporation tax structure, business owners can be employed by the LLC and only the salary paid to the owner will be subject to employment taxes.  Excess profits distributions are not subject to self-employment taxes.  Now, the IRS does require that a reasonable salary be paid and they are quite strict about ensuring that this rule is not abused by business owners.  For example, if you are the sole owner of an LLC and provide consulting services which are paid by the hour, it will be hard to justify that your salary should be significantly less than the income generated by your services directly.

On the other hand, if your LLC business is selli g a product and you have assets of value and/or other contractors and employees, then your salary will not be based on the actual revenue generated.

Accordingly, it is important that you seek the advice of your accountant or tax attorney to ensure that based on your business activity and situation, this kind of structure may be acceptable for reducing overall self employment taxes generated by your LLC business.

Similarly, with a C corporation tax structures, employment taxes are only paid with respect to salaries paid out to owners of a business (this applies to any employees of the business).  However, an LLC business taxed under the C corporation tax structure is subject to double taxation when it comes to income taxation so there is a possibility that any employment taxes saved may be spent on income taxes.  Again, check with your accountant or lawyer to determine what tax structure is best for your particular situation.

VIDEO LIBRARY

It is that time of year when many aspiring business owners find the energy and courage to take the official step of new business ownership. This is a great time to start a business not only because of strong motivation but because it is an ideal setting to start the new year by going down the path to financial freedom.

One of the first steps is to form an LLC and so if you are looking and shopping around for the right online llc formation services company, please watch this video as it will eliminate 90% of problems and issues faced by first time business owners when choosing the right company to form their limited liability companies.

When forming an LLC, each state charges a filing fee to process a formation filing. This fee can vary by state where some charge as little as less than $50 and some charge as much as $600.

Aside from the filing fee, a few states require post formation publications in newspapers.  These states include Arizona and New York. Illinois also has a local county filing and the local county or city may charge a minimal fee.

Each LLC also is required to have a registered agent.  If you meet the requirements to serve as the registered agent and you are willing to do so (which means your name and address become publicly affiliated with the LLC and a part of the public record), there is no additional fee.  However, if you choose to get a registered agent service, you will pay an additional annual fee for this (usually less than $200 a year).

Those are the standard fees generally applicable to forming an LLC.  After formation, most states charge an annual fee to maintain the registration.  This fee is usually between $25-$200 but in some states like California ($800), there is a larger fee.

If you want to see a checklist for a limited liability company, I have written an earlier post with one.

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• Why You Are Crazy To Operate Any Business Without Using An LLC

There are many benefits to you when forming an LLC for your business. First and foremost is limited liability protection. By running your business in a separate entity such as a limited liability company, you are not personally liable for any liabilities, problems and lawsuits that arise due to your business activity. This is a huge benefit.

Many non-LLC owners are shocked every year when they get personally sued for business problems and find that they need to sell their personal assets (like their home, car, other property) or lose their personal savings to cover any resulting liabilities.

Other benefits of forming an LLC include: tax benefits and choices, a more professional and trustworthy business image, lower risk of tax audit, a simple to operate business vehicle, a legal entity that makes it easy to take in investors or other members.

If you are interested, The LLC Expert offers an excellent formation and education service for forming an LLC: The LLC Expert Formation and Liability Protection Package.

When a person puts capital into a limited liability company in exchange for a membership interest, he or she has no legal right to get that capital back unless the LLC and the person otherwise agree to a guaranteed return in a written agreement.  If, on the other hand, a person loans money to an LLC, then the LLC (not the other members) has an obligation to pay back the loan per the loan agreement terms.

In either case, other members of the company are never obligated to personally pay back any capital or loans of another member unless there is some specific side agreement where a member agrees to this.  The LLC protection provision specifically states that no member is personally liable for the debts, obligations or liabilities of an LLC merely because he or she is a member.

HOWEVER, in practice, there are several situations where you could be personally liable to another member:

1. If you personally agree to pay it back at the time.  This is known as a personal guarantee and if this agreement was reached, then yes, you are liagle not under the LLC laws but because you legally agreed to it.

2.  There are securities related laws that you can personally be liable for if you violated them.  If you started your LLC and then went out and found or solicited investor and they put money into your LLC, there is some risk that they may later come back and said you provided false and misleading statements about the investment or the capital raising did not comply with securities laws. This area of liability is beyond the scope of LLC concepts and can get quite complicated.

If you are going to third parties to solicit investment in exchange for ownership interests in your LLC business, you must hire a good business and securities lawyer to assist you with the transaction.  Yuor lawyer will ensure that sufficient disclosured and paperwork are involved so that you will later avoid any personal claims for liability if the LLC business does not work out.

While forming an LLC entity itself is straightforward, the strucuring of relationships among members and investors can be complex and it is wise to get attorney help to protect you and your business.

Also just a side note, you mention INCORPORATE LLC.  The term incorporate is technically a corporation legal entity term and not one applicable to a limited liability company.  An LLC is organized or formed under state law.  It is an unincorporated entity that happens to have all the advantages and benefits of an incorporated entity (corporation). 

Because the LLC is an improvement upon the corporation for most small businesses, it is often referred to as an incorporated LLC, LLC corporation or limited liability corporation. Just a clarification.

You will find a lot of commentary out there about forming an LLC in other states such as Delaware or Nevada.  You may hear that Delaware or Nevada has better established LLC laws when it comes to protection, flexibility and privacy. 

In my experience, if you are going to be conducting your business from your home state, then for 90% of small businesses, you should set up an LLC in your home state.  Here is why:

First, when it comes to protection, every state in the US has LLC laws that provide the same fundamental LLC protection.

Second, it is true that some states require less information to form an LLC then others.  This is a benefit in that you have more privacy in some states when it comes to your LLC business. BUT (and this is a big BUT),  if you are going to run your business from your state, you are going to have to register your LLC in your state no matter what.  If it is not formed in your state, then it will be registered as a foreign LLC.  Any registration will require that you disclose the same information you would have to disclose if you had formed the LLC in that state to begin with.  So, the privacy benefits will not be received. 

PLUS, if you form a limited liability company in another state and then have to registered it in your state, this means paying filing and maintenance fees in two states, possibly having reporting obligations in two states and maintaining a registered agent in both states.  For most small business, the added administration is not worth the effort.

In 10% of the cases, forming in another state may be beneficial such as if you have investors in other states who require it, or you need a series LLC (which is only recognized in some states).  If you are going to take in professional investors such as venture capitalists, you may want to consider Delaware but in these situations, you will likely not be picking an LLC in the first place.

An LLC is designed for the small business owner who runs his or her own business.  Having your LLC in your home state is the simplest and easiest method for gaining the benefits and protections of a limited liability company.

Visit limited liability company home page of The LLC Expert

A common thought among busy business owners is that they will form a limited liability company later when there business gets to a certain size.  By running your business as a sole proprietor without the use of an LLC, you are actually creating a ticking time bomb for liability.

You see, lawsuits are almost always about money.  The more successful your business gets, the more likely you will be targeted.  Litigation lawyers love sole proprietors because they have so much more at risk when a lawsuit is filed.  This means the lawyer has more leverage to extract more money from you to arrive at a good settlement.

So, my first point is that an LLC only protects business activity after forming a limited liability company.  Any activity performed before then can come back to haunt you- even years later.

My second point is very important- if you are presently being sued or in the midst of a dispute which could lead to you being liable, you cannot now form an LLC for purposes of protecting your assets.  If you do this and transfer your assets to the newly formed LLC, you could be liable for a civil offense called Fraudulent Conveyance.

This will lead to you owing significantly more money in fees and penalties and, in some egregious and intentional cases, fraud can be criminal which could lead to imprisonment.

BOTTOM LINE.  Be smart and form a limited liability company at the beginning to conduct all of your business activity as this will be protect you and your assets for future years to come.

When you have decided to form a limited liability company, you should first gather some key information.  Information falls into two categories: (1) Information needed to form a limited liability company (LLC) in your state of formation; and (2) information needed regarding the Members (owners) of the limited liability company and the governance of the limited liability company.

1. STATE LLC FORMATION REQUIREMENTS. Each state varies in its requirements ands some states only require minimal information, but most states will require some or all of the following:

• Name of the limited liability company
• Duration of the limited liability company, if less than perpetual
• Purpose of the limited liability company
• Registered agent’s name and address
• Principal Office address
• Initial members/managers name and addresses
• Whether the limited liability company is member or manager managed
• Organizer of the limited liability company

Please note that because the filing document to form a limited liability company is a matter of public record, in most cases, you only want to include what is absolutely required in the formation documents.  There are exceptions to this when the business or the ownership of the limited liability company necessitates the inclusion of additional provisions.

2.STRUCTURING A LIMITED LIABILITY COMPANY. Once you form a limited liability company, you will need to admit members to the limited liability company and impose a governance structure or set of rules for which the LLC will operate under.

• Any reservation or limitations of the right to admit new members
• Dissolution events and the right to continue business following an act of dissolution
• Management Structure Details
• Manager’s names and addresses, if managed by managers
• Contributions of members to the limited liability company
• Future contributions required of members to the limited liability company
• Voting procedures for approving limited liability company decisions
• Limitations on the ability for a member to sell or transfer ownership interests
• Possible buy-sell provisions (allowing for the limited liability company or certain members to buy back the ownership interests of other members)
• Obligations of any Member to the limited liability company
• Taxation structure for the limited liability company

The actual formation of a limited liability company with the state is a relatively straightforward process and can be done for you efficiently using The LLC Expert’s Services for Forming an LLC.

However, the area of limited liability planning regarding structuring can be quite complex and so it is always recommended that you seek the advice of an LLC lawyer to advise and help with this structuring.  Generally, most of the items are set forth in the LLC Operating Agreement but some matters can also be addressed in other written agreements such as loan agreements, services agreements, employment agreements or separate member agreements with the members.