What is an LLC?
An LLC is a limited liability company. It is a business entity that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. What this “pass-through” taxation means is that business profits or losses are reported on the LLC owner’s personal income tax return. The LLC itself is not taxed. LLC owners are also given the protection afforded to corporations by limiting the personal liability of the LLC owner for business debts and claims. If the LLC is sued or owes money, generally only the assets of the business itself are at risk.
How to Form an LLC in Ohio
Forming an LLC in Ohio is a relatively straightforward process. This process begins by going to the Ohio Secretary of State’s website and conducting a business name search. This will allow you to ascertain whether the name you wish to call your business is available. When considering a name be aware that business names must be “distinguishable upon the records in the office of the Secretary of State” from other business names that are already registered. For example, “Johnson and Johnson” is not distinguishable from “Johnson & Johnson.” If your business name is available, go ahead and claim it.
Once you have decided on a name and it is available, the next step is to complete form 533A “Articles of Organization for a Domestic Limited Liability Company.” There is a filing fee of $125 and this form can be completed and submitted electronically. Once the state of Ohio has approved your business filing, contact the IRS or go to their website and apply for an EIN (Employer Identification Number). Even if you are not planning on having employees, you will need this number to be able to open a business account at a bank.
After you receive your EIN, contact the Ohio Department of Taxation for information on state and local tax obligations. If you intend on hiring employees, contact the Ohio New Hire Reporting Center, Ohio Bureau of Workers’ Compensation and Ohio Department of Job & Family Services. In addition to contacting these agencies, many businesses require licenses and permits. The Ohio Business Gateway provides a list of professional licenses and business permits necessary to do business in Ohio. Once these requirements are completed, hire employees for your business and consult an attorney regarding the creation of an LLC operating agreement to protect your business.
Do I Really Need an LLC Operating Agreement
Although the State of Ohio does not require an LLC operating agreement, you should not start a business without one. First, an LLC operating agreement ensures that courts will respect your business’ limited liability protection by demonstrating that you operate a legitimate business. Second, this agreement will set forth the rules that will govern your business, such as how profits will be split between members, how major business decisions will be made, and the mechanisms by which the addition and departure of members are handled. Third, it regulates how the business owners can make decisions relating to the management and finances of the business. Finally, the state of Ohio has default rules for how an LLC must operate. Without an LLC operating agreement, these default rules will govern your business. However, with this agreement, you can craft your own operating rules which will supersede the default rules.
How are LLCs Taxed?
An LLC is a business entity that allows “pass-through” taxation. This means that LLC owners report business profit and losses on their personal income tax return. The LLC itself is not taxed as a separate entity. However, LLC taxation can become quite complicated.
LLCs are not a recognized business entity by the federal government. Therefore, LLCs have several options in regard to how they are taxed. LLCs can be taxed as a corporation, partnership or sole proprietorship. To elect a classification, an LLC owner must file Form 8832. The default for single member LLCs is sole proprietorship; for multi member LLCs the default is partnership. Single member LLCs must file Form 1040 Schedule C; partners in an LLC must file Form 1065. If an LLC decides to be taxed as a corporation, Form 1120 must be filed. Additionally, LLCs are not considered separate tax entities from its owners for tax purposes. The LLC does not pay income taxes itself. Instead, the LLC owner(s) pay taxes on their share of profits and losses on their personal tax returns. The state of Ohio recognizes LLCs as business entities, but follows the election when you file for federal taxes.
Why would an LLC elect to be taxed as a corporation? The reason some LLC owners decide to be taxed as a corporation is that it can reduce their taxes by allowing them to retain a significant amount of money in the LLC. This can be done by filing Form 2553. This allows the LLC to be taxed as an S Corporation. This can save you from paying Social Security and Medicare Tax on “distributions” from the business, but this election must be made within 75 days of the beginning of the year.
After deciding how your LLC will be taxed, now you must actually pay taxes. Income generated by an owner from his or her LLC is not taxed in the same manner as wages earned by employees. Instead, owner(s) of an LLC must pay self-employment taxes on an estimated basis. If taxes are not withheld, you will likely need to pay an estimated tax on a quarterly basis. You will be required to send enough of your revenues to cover your income tax and self-employment tax (Social Security and Medicare) obligations.
For new businesses, estimating the amount of tax that you owe can be a challenge. You will need to ascertain what your adjusted gross income, taxable income, taxes, deductions and credits are. Consult Form 1040-ES and the IRS Estimated Tax Guide to calculate what you should pay for estimated taxes. Payments are due on a quarterly basis. Specifically, payments are due on the 15th of April, June, September and the following January. The failure to make quarterly payments can result in a penalty.
This article should not be taken as legal advice and does not create an attorney-client relationship. For a detailed discussion on taxation, please contact a tax professional. If you wish to form an LLC, call (614) 987-0192 and speak with attorney David Johnson at Johnson Legal, LLC.