If you’re starting a business and planning to hire employees at some point, you may be wondering if a limited liability company (LLC) is an option for you. Can an LLC have employees? The good news is that the short answer is “yes”, but hiring employees comes with a host of considerations for your LLC.
Here we’ll explore the implications of hiring employees for your LLC.
What is an LLC?
An LLC is a type of business entity formed with the state and a popular choice for entrepreneurs because of the many benefits that it offers. An LLC is a pass-through entity, meaning that the LLC itself is not taxed. Instead, the profits or losses of the LLC are passed through to its owners, who are called members. Members of the LLC then report those profits or losses on their personal tax return on a Schedule C, and pay taxes at their personal income tax rate.
Sole proprietorships and partnerships have the same pass-through taxation, while corporations, on the other hand, are subject to corporate taxes. Dividends paid to shareholders of the corporation are also taxed, which is referred to as “double taxation.” This is one reason that entrepreneurs choose to set up an LLC rather than a corporation.
Another benefit of an LLC is the personal liability protection that it offers to members. The LLC and its members are considered separate entities, which means that the LLC can have its own assets and debts. Therefore, if the LLC cannot pay its obligations or is sued, the members are not personally liable for payment.
In contrast, with a sole proprietorship or partnership, the business and its owner or owners are considered one and the same. That means that the owners are personally liable for all obligations of the company. If the owner or owners do not pay the obligations, their personal assets, including their homes, are at risk.
An LLC also offers much management flexibility, which differs from corporation requirements. A corporation must appoint officers and a board of directors for the company, while with an LLC, you can structure your management any way that you choose.
Can an LLC Have Employees?
So, as mentioned, yes, an LLC can have employees, but having employees adds a layer of complexity to your business as well as an expense. Many labor regulations come into play when you have employees, as does the process of payroll.
As an alternative to hiring employees, you can hire independent contractors and utilize their services. For example, you might hire a freelance technical developer, or a marketing agency. You’ll pay them by the hour or per project and report their income on a 1099 form.
One caveat is that you cannot direct independent contractors about when and where they can work. By doing so, you’re treating them as employees, which can have serious legal repercussions.
Legal Requirements for an LLC to Have Employees
First of all, when your LLC has employees, you’re required to get an Employer Identification Number (EIN) for your LLC. An EIN allows the IRS to identify your business for tax purposes, and allows you to withhold and pay employee taxes. It’s easy and free to apply for an EIN on the IRS website.
Second, you’ll need to comply with federal and state employment laws, including minimum wage and overtime laws. You’ll also have to comply with non-discrimination laws, equal pay laws, and regulations under the Affordable Care Act.
You may also be required to purchase worker’s compensation insurance.
Many business owners hire an outsourced HR services company to handle their human resource needs.
Tax Implications for an LLC with Employees
By hiring employees, you’ll have to face the challenges of payroll taxes. You’ll have to register with your state and locality to withhold and pay state and local income taxes for employees, as well as federal taxes. You’ll also be responsible for paying certain payroll taxes yourself, including Medicare and Social Security taxes, and federal and state unemployment insurance taxes.
You also have to manage the process of paying your employees, and issuing them W-2 forms. Payroll and payroll taxes are a complex and time consuming process, with complex calculations involved. That’s why many business owners choose to hire a payroll service to handle these functions.
If you offer benefits, such as health insurance, you’ll also have to tackle the administration of the benefits and the proper withholdings for benefits.
There are many services that offer both HR, benefits administration, and payroll services, so it’s worth considering. It will save you mountains of time and keep you in compliance with all regulations.
The good news is that you can deduct your employee expenses on your tax return if you meet the IRs requirements. Your payments to employees and other employee expenses must be:
- Ordinary and necessary
- Reasonable in amount
- Paid for services actually provided
- Paid or incurred in the year for which you claim the deduction
Business taxes, particularly when you have employees, can get quite complex, so you should have a tax advisor help you plan for and prepare your tax returns.
Benefits and Drawbacks of Hiring Employees
Clearly, most entrepreneurs cannot go it alone, and need a team to help the business to operate and grow. However, it’s an expensive proposition even beyond what you pay the employees. It’s also complex, with any number of rules and regulations to follow.
Engaging independent contractors for certain functions can save you money – no payroll taxes or fees from payroll and HR providers. However, you’ll find that hired employees are generally more dedicated to the company, and to helping the company advance its goals.
Independent contractors also come and go, while employees – if you keep them happy – are likely to stay with you for the long term.
Conclusion
So, back to the original question – of course, you can hire employees for your LLC! You just need to be fully aware of all that’s involved, and how important it is to comply with labor and tax laws. Most small businesses do not handle HR and payroll internally, since hiring an external HR and payroll service is generally less expensive than hiring an HR professional.
When you’re forming an LLC and hiring employees, don’t hesitate to consult with your attorney and tax advisor when you have questions. You’ll want to make sure that your business gets off on the right foot.
