What is an LLC and is it right for my new company?
In addition to partnerships and corporations, new businesses in Colorado can be established as LLCs. This type of structure offers many unique benefits.
Setting up a new company in Colorado is rarely an easy thing. Having ideas for products or services is only one of many decisions that must be made by owners. Deciding how to structure a business on a day-to-day basis is also important and can have a great impact on the ultimate outcomes from taxation to ownership.
Many people try to choose between entering into a partnership or starting a C corporation. However, there is another option somewhat in the middle of these two choices that is growing in popularity-the limited liability company.
Operating structure not the same as taxation structure
Forbes cautions new business owners from not separating out the tax implications and the decision-making implications of each business model. For many companies, LLCs may offer the most advantageous tax model . At the same time, an LLC may not offer entrepreneurs the operational controls they desire. The operation of the business should take precedence in determining a model over taxation.
For businesses that need maximum flexibility in offering stocks, C corporations are often the best choice. However, when this is not required but individual protection is important, an LLC can be the way to go. LLCs, like C corporations, protect individuals from liability.
Company or member taxes
Tax structure is one of the key differences between an LLC and a C corporation. The owners of a C corporation do not personally pay taxes on any profits made by the company. This is referred to as a non-pass-through model. In contrast, the owners of an LLC do pay taxes on the profits made by the company.
Owners of an LLC are called members and all company profits are funneled through to members. This is called a pass-through model. LLCs do not pay direct taxes on profits since the members pay the taxes. This method of members paying taxes also means that the members can deduct losses from their personal tax returns.
Taxes for Social Security and Medicare are also handled differently in LLCs than in C corporations. Profit sharing received by LLC members is not subject to these taxes. However, any income received from directly working in an LLC could be subject to self-employment taxes which could include these items.
Complex decisions require professional input
Colorado business owners and creators should always get the advice of a business attorney before selecting their final operating structure. It is essential to understand all facets of the different options available in order to know how to make the best choice for a given company.