Which of the Following is True of an LLC? Common Misconceptions Explained

If you’re considering forming a limited liability company in Nevada or another state, you’ve probably read or heard different statements about it. Several myths and misconceptions have been attached to LLCs, potentially confusing and discouraging even the most seasoned entrepreneurs.

To help you make an informed decision, we’ve listed and debunked some common misconceptions surrounding LLCs. Read on to uncover the truth hidden behind these myths.

On LLCs & The Formation Process

Myth: LLCs & corporations are the same.

Some consider LLCs as corporations. However, several differences exist between both entities.

• Corporations are subject to more formalities than LLCs.
  • For example, corporations must designate directors and hold annual shareholder meetings.
  • LLCs are easier to manage since there are no formalities required from them.
• LLCs and corporations are also taxed differently.
  • Corporations are subject to double taxation, meaning they’re taxed at the shareholder and corporate level.
  • An LLC’s profits and losses are passed to its owners or members. As a result, the business doesn’t have to pay corporate taxes.
• Finally, corporations must comply with more stringent regulatory requirements. Fewer and more lenient laws apply to LLCs.

Myth: LLC formation is complicated.

Unlike other business structures, LLCs are created through a fairly simple process.

The LLC formation process varies by state, but you’re typically required to pay the necessary fees and file Articles of Organization with your Secretary of State. Each state asks for specific information, including your LLC’s respective names and addresses and its registered agent (if you’ve already hired one).

After creating your LLC, you can take other important steps such as obtaining business licenses and permits and opening a business bank account.

Myth: All states set the same requirements & fees for LLC creation.

Many people also think that LLC formation requirements are fixed across all states. But as you prepare to register your business, you’ll find that each state has different LLC filing requirements despite asking for documents with similar information.

All states also charge different LLC filing fees, and the liability protection covering LLCs varies by location. Understanding your home state’s formation requirements and hiring a professional business formation service provider will help you avoid problems during the registration process.

Myth: Only small businesses can form LLCs.

Even the biggest businesses manage and run LLCs. Amazon is one renowned example of a large enterprise with LLCs under its umbrella.

By operating LLCs, Amazon effectively handles operational threats while improving its tax management. This only shows that LLCs can be created to meet the needs of big and small businesses. Once a corporation working across various industries decides to form an LLC, it can determine how the new business will be managed and taxed.

On Taxation

Myth: LLCs are purely taxable entities.

The U.S. Internal Revenue Service (IRS) doesn’t classify LLCs as taxable entities. An LLC’s tax status is determined by the number of members it has.

• You’ll be taxed as a sole proprietorship if you operate a single-member LLC. Your income is listed on a Schedule C form.
• Multi-member LLCs are taxed as a partnership.
  • These LLCs file IRS Form 1065 annually.
  • Furthermore, each member receives a Schedule K-1 form. This form specifies how much of the company’s profit is distributed to the individual, as listed on their personal tax return.
• Alternatively, LLCs can elect corporation or S corporation tax status through a dedicated IRS filing. An LLC taxed as any of these businesses operates as is.

Myth: You can pay fewer or no income taxes with LLCs.

This misconception arises because certain states, including Nevada, do not impose state income taxes on businesses.

While forming Nevada LLCs means no state income tax to handle, you’re required to pay federal income tax on the company’s net income. As for LLCs created outside of Nevada, they must be registered with their home state and pay the necessary state income taxes, state sales taxes, and fees. You build and maintain a tax presence or nexus if you operate an LLC in any state.

Other Misconceptions About LLCs

Myth: LLCs completely reduce personal liability.

The “limited liability” part in LLCs refers to limited liability protection. Sometimes, LLCs can’t shield you from certain liabilities.

Suppose you’ve taken a loan with a personal guarantee and you failed to settle it. This situation may allow creditors to “pierce the corporate veil.” For a court of law, an LLC has the same rights or liabilities as its members. This also combines business and personal assets.

It’s advisable to keep business and personal finances separate to reduce legal liabilities. This can be done through separate bank accounts, avoiding shared funds, and proper record-keeping.

Myth: Only U.S. citizens can form LLCs.

In reality, people from other countries can form LLCs in their chosen state.

Taxation sets LLC owners of different citizenships apart from each other. If you are a U.S. citizen, you need a Social Security number (SSN) to file and pay taxes. Resident aliens must apply for a Taxpayer Identification Number (TIN) with the IRS and pay corporate taxes.

Myth: Home-based businesses & sole proprietors don’t need LLCs.

Forming an LLC can be helpful even if you do business from home or without partners or employees.

Home-based businesses and sole proprietors face operational and legal challenges. And if you serve customers or clients alone, you can lose personal assets by incurring business liabilities.

Conversely, LLCs separate personal and business assets so creditors can only pursue the latter. They also protect privacy, as several states allow people to form anonymous LLCs.

The Bottom Line

It’s easy to believe the many false statements made about LLCs and decide against forming such entities. However, you’ll find that the benefits of LLCs outweigh the myths and misconceptions surrounding these businesses.

A trusted business formation expert can help you answer “Which of the following is true of an LLC?” and provide other valuable insights to inform your decision. Call NCH at 1-800-508-1729 or contact us via our website today to speak to our business formation specialists.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.