LLCs, or Limited Liability Companies, are relative newbies to the business structure world, but they’re all the rage. Key among them is the limited liability. An LLC’s members (think of them as shareholders) are not personally liable for the business if it goes belly up. In addition, members pay taxes only once — on their earnings — rather than ponying up twice (corporate and individual taxes), which is what happens in a regular (C) corporation. And when tax time does come around, filing is easy if you’re an LLC. If you’re the only member, just follow a Schedule C with a 1040 form. If there are two or more members, the LLC files Form 1065 (an information return) with the IRS, and the members then report their share of income and deductions on their personal returns.
And the downsides: You'll have to cough up income taxes on your profits, and you’ll also have to pay self-employment tax to cover both the employer and employee share of Social Security and Medicare taxes on your net earnings. In other words, make money, and you’ll pay for it. The other hitch is that since LLCs are relatively new, how they’re taxed at the state level can vary from state to state.
Barbara Weltman has been a tax and business attorney since 1977. Browse her list of published books, including J.K. Lasser’s Guide for Tough Times: Tax and Financial Solutions to See You Through and The Complete Idiot’s Guide To Starting a Home-Based Business. If you're starting or running a small business, you may want to sign up for her Idea of the Day (sm). Like DailyWorth, they're concisely written business and tax tips for the busy entrepreneur.