An LLC is an excellent business structure option if you’re starting or already own a business in North Carolina. LLCs offer their owners limited personal liability for business actions and tax treatment to prevent corporate “double taxation.” In this blog post, we’ll explore the different types of Limited Liability Companies in our state and determine which one might be best for your business venture. We’ll also look at the benefits of forming an LLC in North Carolina. So whether you’re just starting or you’ve been in business for a while, read on to learn more!
What is an LLC in North Carolina?
Most business owners start without formal business structures and pay taxes as sole proprietorships or partnerships. These business structures do not offer any protection from business debts and obligations.
However, as a business owner without liability protection, you can face issues such as creditors of your business coming after you personally for your business debts.
A company’s debts could result from a bad deal made by a partner. However, you can be personally liable for a company’s debts, even if your partner made the mistake. Unlimited liability is not a wise choice for a business owner. Limiting your liability is just one reason why it can be advantageous to form an LLC.
An LLC in North Carolina is a business entity where the owners are known as “members.” LLC members can be individuals, other businesses, or both. The LLC business structure combines elements of both partnerships and corporations and provides its owners with personal liability protection from debts accrued by their business. The structure also allows for flexible management options, tax advantages, and more.
LLCs generally pay income taxes by allocating the net income or loss of the LLC among its members. Then, members submit the relevant taxes on the individual portion of gains or losses (known as a distributive share) when filing their personal tax return.
Limited Liability Company LLC Management Structures and Agreements
LLC Operating Agreement
Before forming an LLC in North Carolina, business owners generally create a comprehensive operating agreement. This document outlines the financial and functional decisions of the company, such as voting rights, rules, and regulations. Creating an operating agreement protects all members from any potential disputes that might arise down the line.
For help writing a comprehensive and legally-binding operating agreement, business owners in North Carolina are encouraged to seek professional help from an experienced attorney.
Manager Managed LLC
Manager-managed LLCs are a type of LLC in which one or more members are appointed as managers. The managers in this type of LLC have the same duties and powers as board directors in corporations and make decisions about day-to-day business management.
Member Managed LLC
In member-managed LLCs, all owners take an active role in management. Member-managed LLCs are simpler to manage and often have fewer formalities than manager-managed LLCs.
Different Types of Limited Liability Companies
North Carolina recognizes many types of LLCs: single-member LLC, multi-member LLC, professional limited liability company (PLLC), and Series LLC.
Sole Proprietorship LLC
A single-member LLC is a company owned and managed by one person. Much like a sole proprietorship, as the sole owner, you can control all business decisions without consulting with other members.
Single-member LLCs in North Carolina are often referred to as “disregarded entities” because they are not taxed separately from the single member, and their income is passed through directly to the individual.
Multi Member LLC
Two or more individuals or businesses own multi-member LLCs. This type of LLC offers multiple members personal liability protection and can provide flexibility in terms of taxation and management.
Multiple-member LLCs in North Carolina often pay taxes as a partnership, meaning each member is responsible for reporting their share of the profits and losses to the IRS. Multiple owners mean that the organizational structure is more complex, and decisions must be made by consensus.
PLLCs offer business owners the same benefits as other LLCs, such as personal liability protection and taxation flexibility.
A PLLC is a type of LLC in North Carolina that offers personal liability protection to professionals such as lawyers, doctors, and architects who are subject to state licensing requirements. The members of the PLLC must all be licensed in the same profession or occupation, and each member is liable for only his or her own negligence.
A PLLC with one individual member is taxed as a sole proprietorship, whereas a PLLC with more than one member generally pays taxes as a partnership.
A Series LLC allows for two or more separate businesses to operate under one LLC. Each business can have different members, managers, and assets without being registered as a separate LLC.
In North Carolina, business owners create a series LLC as an unincorporated entity organized under the law of another state. In NC, the company must be characterized best as an LLC and not as a corporation, partnership, or trust. (1)
L3C, Restricted LLC, and Anonymous LLCs are other legal structure types in other states. North Carolina doesn’t recognize L3C as a legal structure as of 2014. (1)
Business Partnerships with Limited Liability
Some similar businesses enjoy limited liability but are not called LLCs. Instead, they are called limited partnerships, limited liability partnerships, and limited liability limited partnerships.
Limited Partnership (LP)
An LP consists of one or more general partners and one or more limited partners. General managers run the business, and limited partners are silent partners. General partners face unlimited liability for partnership debt and obligations. However, limited partners only face liability for the assets they contributed to the partnership.
Limited Liability Partnership (LLP)
An LLP is two or more owners or partners who own a business together. The partners face unlimited personal liability for the general obligations of the partnership. However, each partner faces only a limited amount of liability (up to the full amount of their capital contribution) for the malpractice of a partner.
Limited Liability Limited Partnership (LLLP)
In this type of limited partnership, the general partners have unlimited personal liability for the general obligations of the limited liability partnership. However, as a general partner, each individual faces a limited amount of liability (up to the total amount of their capital contribution) for a partner’s malpractice. Limited partners only face liability up to their capital contributions.
Filing Taxes as an LLC in North Carolina
The Internal Revenue Service (IRS) does not have an LLC designation for Federal income business taxes. An LLC files a business tax return using existing Federal tax status designations, which include:
- Sole Proprietorship: A single-member LLC in North Carolina may file with the IRS as a “disregarded entity” and be taxed in accordance with individual income tax laws.
- S Corp
- C Corp
Most LLCs are pass-through entities. Members pay self-employment tax and individual taxes on their personal returns. An LLC that files as an S-corp is also a pass-through entity.
According to the IRS, S corporations pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes, called pass-through taxation. Shareholders of S corporations report the pass-through of income and losses on their personal tax returns. The IRS assesses their taxes based on their individual income tax rates.
S corporations avoid double taxation on corporate income. However, rates may depend on the owner’s personal assets. Depending on your tax rate as an individual, it may make more sense to become a C corp. If you’re in a higher tax rate, you could pay more in taxes overall! S corporations are also responsible for tax on certain built-in gains and passive income at the entity level. (1)
An LLC may register as an S-Corporation by completing IRS Form 2553.
On the other hand, when an LLC files as a C corporation, it pays taxes through corporate filings. Then, shareholders also pay based on their business distributions from company assets. Paying tax twice on C Corp business assets is called “double taxation.”
LLCs file North Carolina tax returns the same as federal tax returns, except that LLCs filing as an eligible S Corporation or partnership can file an NC Tax Return as a “Taxed PTE Election.”
Choosing the Best Business Structure for Your Venture
North Carolina taxes each type of business differently according to their legal entity type. Tax obligations vary depending on many factors. Talk with a North Carolina business attorney to fully understand the tax advantages of different business structures.
An experienced business attorney can help you determine which structure offers the best tax benefits, organizational structure, liability, and efficient day-to-day operations for your business venture.
Our Experienced Business Attorneys Can Help
At Hopler, Wilms, and Hanna, our knowledgeable North Carolina business attorneys are here to help you choose the best business structure for your venture. We have an in-depth understanding of North Carolina tax laws and regulations and can provide the information you need to make informed decisions about your business’s legal entity type.
Contact our office today for a consultation and learn how to start, grow, and thrive as a business in our state!