What is an LLC?
LLC stands for Limited Liability Company and is a business structure that offers certain protections to its members. Owners use this arrangement to shield their personal assets from any lawsuits or losses that the business might face. An LLC is also what’s known as a pass-through entity which means that the profits and losses of the company are “passed through” the members and then are claimed on their personal taxes. There are certain tax advantages and disadvantages to setting up a business as an LLC that we will outline below.
What are the Advantages of an LLC?
There are many benefits of starting an LLC. Here are 7 key advantages of forming an LLC in New Mexico.
Limited Personal Liability
The biggest benefit of forming an LLC is the limited personal liability. Members are free to profit from the business knowing their personal assets will be shielded from loss or litigation. An LLC is also able to protect all its members from liability whereas a limited partnership can only protect its partners.
Because LLCs are pass-through entities and the company’s income is declared on the individual returns of its members, it is not subject to corporate income tax or double taxation that many C corps have to deal with.
LLCs are in a position to decide on the management structure of their business, and can elect to be taxed as an S Corp if they wish. Consulting with a CPA can help you decide if S Corp filing will give you a tax advantage.
In New Mexico you are able to form your LLC anonymously without listing the owners or managers of the company. If you wish for privacy and further separation of your personal and business lives, forming an LLC in New Mexico may be a good step.
No Annual State Fees
In New Mexico, after you file your initial paperwork for forming your LLC, there are no further annual filings or fees to maintain it as there are in most other states.
No Residency Requirement
The members of an LLC in New Mexico are not required to live in the state, you only have to have a registered agent in the state to qualify.
What are the Disadvantages of LLCs?
Potential for Higher Taxes
Some businesses will not benefit from the structure of an LLC. By passing through business income onto individual returns you also have to account for costs like self-employment taxes or franchise taxes in some states (though the franchise tax in New Mexico is only a flat fee of $50 annually). These costs may actually increase your taxes whereas in another corporate structure they would be lower or you’d have more deductibles available such as an S Corp or C Corp.
May Deter Investors
Some investors may not wish to contribute to an LLC and would rather invest in a company that’s able to offer stock options.
Extra Bookkeeping Work
Because your business and personal taxes will be combined, and in cases of multi-member LLCs divided between people, it can make for more complicated accounting. You’ll have to ensure that your individual assets and finances are secure as you incorporate your business profits and losses.
Harder to Transfer Ownership
In some cases, it can be harder to transfer ownership of an LLC than it may be with a corporation. This is because members of corporations are shareholders and they may sell their stock to others fairly easily. In an LLC typically all members have to agree to transfer ownership since there are no stock options.
Who Should Start an LLC in New Mexico?
Many businesses can benefit from forming an LLC. Because of its flexible tax structure and options for filing, an LLC can accommodate many different business models. LLCs are good for those who wish to keep their personal assets safe with the limited liability nature of the structure, and who may also benefit from being a pass-through entity. Consulting with an experienced CPA or business lawyer is a good first step when considering how to structure your company.
New Mexico has very lenient requirements for their LLCs which make it a popular state to form businesses in. Because you don’t have to live in New Mexico to form an LLC there and there are no annual fees, businesses from around the country look to it as an option.
Many e-commerce businesses can benefit from forming an LLC in New Mexico due to the lax residency requirements and that you can also do all filing online. The only stipulation is that you’ll need a resident registered agents, but there are many in New Mexico who you can hire to complete your in-state filing
How a Business Lawyer can Help
If you are considering starting an LLC, it can be very beneficial to consult with a business lawyer. Although you do not need a lawyer to file the paperwork needed to start the company, they can be helpful in deciding which tax structure to use (whether you will elect S Corp status) and can help in drafting your articles of organization or your operating agreement.
By setting up the procedures and protocols of your business up front, it will allow you to maximize the usefulness of the LLC designation.
A business lawyer can also help you decide which state will be the most advantageous to form in, as each state has its own set of filing and tax requirements. This can be especially useful for companies who do business in multiple states.
There are a number of online options for legal consultation, but it’s always a good idea to seek recommendations from other local businesses as the state laws can vary so much. You’ll want a lawyer who is intimately familiar with all state and federal regulations for LLCs to maximize your profits and minimize your tax liability.