• by admin
• December 31, 2023

An LLC is a separate legal entity. LLC stands for a Limited Liability Corporation in the United States. A separate legal entity means an entity (similar to an individual for legal purposes), which has its own registered name, has its own tax identification number, files and pays taxes in its own name. This entity can be sued in court or can be sued by a third party. It has its own assets and liability, completely separate from its incorporators and members.

It is a legal business structure that combines elements of a corporation and a partnership or sole proprietorship. The primary characteristic of an LLC is the limited liability protection it provides to its owners, known as members.

When you are doing business in the United States, you have many options to choose from, and establish a business entity for legal and tax purposes. If you want to know more about the types of legal entity options in the United States, please follow the link below or contact RKB Accounting.

 

TYPES OF LEGAL ENTITIES IN THE USA

 

The simplest form of doing business in the United States or in Canada is doing business in your own name, and this form is called being self-employed. If you are doing business as self-employed, you report the business income/loss on your personal income tax returns. However, the drawback of doing business as self-employed is that your personal assets are also at risk in case a third-party liability arises.

To get third-party liability protection, you can choose the next form of business, which is a corporation. In other words, you may want to incorporate your business. In this form of business, only the assets of the corporation are at risk, not your personal assets. In Canada, you can also take advantage of the “small business deduction” and pay a much lower income tax on the income of the corporation, subject to some limitations as per the Income Tax Act of Canada. In the United States, you do not have the advantage of any small business deductions. The corporation pays a flat federal income tax on its income and state income tax as per the state’s income tax laws.

A Limited Liability Company in the United States can be an entity that is in between a self-employed and a C Corporation. In Canada, we do not have a legal entity called a Limited Liability Company. You can not incorporate as a Limited Liability Company in Canada.

 

You can only incorporate as a Limited Liability Company in the United States.

Below are the most common features of an LLC:

• Limited Liability Protection: The main advantage of an Limited Liability Company in the United State is that it offers limited liability protection to its members. This means that the personal assets of the members are generally protected from the business’s debts and liabilities. In the event of legal action from a third party or financial obligations, the member’s personal assets are typically not at risk beyond their investment in the LLC. In the event that the assets of the LLC is not enough to pay a liability or debt, the LLC can declare bankruptcy and close the LLC.

 

• Pass-Through Taxation: This is where you need to decide, if you want to incorporate as a C or S Corporation or you want to form an LLC? Unlike a traditional corporation, an LLC is not a separate tax entity. Instead, income and losses “pass-through” the business to the individual members, who report this income on their personal tax returns. This avoids the double taxation that can occur with C corporations. A single-member LLC is treated as a pass-through entity for tax purposes. If you have more than one member in the LLC, you have an option to make an election, whether you want to treat your LLC as a partnership or as a corporation for income tax purposes.

 

• Flexibility in Management: LLCs provide flexibility in terms of management structure. Members can choose to manage the LLC themselves or appoint managers to handle day-to-day operations. This flexibility allows for a customized management approach that suits the needs of the business. In the event of having more than one member in the LLC you may like to write and adopt an Operating Agreement for the LLC.

 

• Ease of Formation and Administration: There is no federal incorporation in the United States as we have in Canada. If you want to form a corporation or an LLC in the United States, you have to choose a state and follow the state requirements. Forming an LLC is relatively straightforward compared to other business structures like corporations. State requirements vary, but in general, it involves filing articles of organization and creating an operating agreement that outlines the structure and operating rules of the LLC.

 

• Perpetual Existence: An LLC can have a perpetual existence, meaning it can continue to operate even if members leave or new members join. The life of the LLC is not tied to the lives of its members. The only requirement is that the LLC must have at least one member.

 

• No Restriction on Membership: LLCs can have a diverse range of members, including individuals, other LLCs, corporations, and even foreign entities. There are generally no restrictions on who can be a member. You may also want to check this with the state in which you are planning to form an LLC.

 

It’s important to note that while an LLC provides limited liability protection, certain actions or circumstances can potentially lift the corporate veil, exposing members to personal liability. This applies to any form of entity which has limited liability protection. Your entity can lose the limited liability protection, for example, involved in fraudulent or criminal activities. Additionally, the specific regulations and rules governing LLCs can vary by state, so it’s essential to understand the requirements in the state where the LLC is formed.

 

At RKB Accounting, we provide incorporation and formation services in all the states of the United States. We also help our client in choosing the right type of entity and help in cross border tax planning.

 

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

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