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Why businesses structure themselves as LLCs

On Behalf of | Jul 30, 2020 | Business Law

Individuals who decide to start their own business are faced with a multitude of decisions. In addition to having to decide what, exactly, the company is going to offer, entrepreneurs also have to decide what sort of structure they want to implement for their new startups.

One of the most popular choices for an entrepreneur to choose for his or her new business is a Limited Liability Corporation, or LLC. An LLC is a business structure that is available to entrepreneurs and is outlined by the laws of their individual states.

One of the reasons that LLCs are so popular is that, essentially, any type of business can be registered as an LLC. The only exceptions are typically banks and insurance companies.

Under existing business law, an LLC can be recognized by the IRS as either a corporation, a partnership or a portion of the owner’s tax return. The number of people involved in the creation of the company is directly related to the way that the company will be viewed for tax purposes.

In addition to the business’s structure, an entrepreneur will also be assigned an effective date of election, which further defines the tax standing of his or her organization. If the business owner disagrees with the assigned classification, there is paperwork that can be filed to challenge this effective date of election.

Any individual who is considering opening his or her own business is encouraged to work with an attorney who is well-versed in his or her state’s business law. A lawyer may work with his or her client to prepare all the documentation that is required, help that person work through the process of selecting a business structure and challenge his or her tax status if necessary.