A limited liability company is a specialized business structure that offers several advantages. It is the preferred corporate classification of small entities and starting businesses due to its simplicity and flexibility.
We have a team of business experts who have over ten years experience in limited liability companies. They will guide us on what an LLC company is, explain to us the advantages of such a company, and look at how such companies operate.
Quick Summary:
- An LLC is a business entity which separates the assets of the company from the personal property of the members.
- An LLC enjoys pass-through taxation, the company itself is not taxed but profits and losses are paid by the members' through personal tax returns.
- An LLC may have only one owner-member, similar to a sole-proprietorship, or several members resembling a partnership.
What is an LLC?
An LLC is a type of legal business entity that separates the assets of the company from its members to protect their personal property in case of legal action [1].
In case someone sues a limited liability company and wins, they will only recover what the company itself owns, and not what the different LLC owners have as their private properties.
Types of LLCs
LLCs may be structured and managed based on the nature and purpose of the business entity. Each form of limited liability organization has advantages to fit the needs of the company.
To start an LLC, determine which business structure would be the most appropriate for the enterprise.
The main LLC types are as follows:
1. Single-Member LLC
A single-member LLC consists of only one member-owner and is classified as a 'disregarded entity'. The lone member owns, manages and operates the business and has the rights to all profits but is responsible for all liabilities the company may incur.
2. Multi-member LLC
A multi-member LLC is owned and operated by several individuals referred to as 'members'. A multi-member LLC has the option to draft an operating agreement, in which all owners are required to sign. The document outlines the rules, regulations, voting requirements and ownership distribution of the entity.
3. Member-Managed LLC
A member-managed LLC is collectively managed by the company's owners. The members oversee day-to-day operations, make business decisions, enter into contracts and supervise financial and legal matters within the company.
4. Manager-Managed LLC
The members of an LLC have the option to employ an independent manager or a managerial service provider to run operations on behalf of the company. The expertise of a professional and experienced manager is beneficial to the company.
Read More: What is an LLC Managing Partner
How Does Limited Liability Company (LLC) Work?
A limited liability company (LLC) works similarly as a partnership or corporation. When you form an LLC, it can have more than one owner, and they are called members.
Still, unlike corporations and partnerships where two or more partners must agree on how to run the business, LLCs permit single-member companies with no need for an agreement between members.
Members of limited liability companies (LLC) enjoy protection from creditors and other claimants against their personal assets by declaring what is called a "limited liability."
Limited liability companies are legal entities and can be taxed as a pass-through entity (S corporation, Sole proprietorship, Partnership) or as a C corporation.
The limited liability feature of LLC is the most common form of business operation to offer protection. It's the reason a lot of people form an LLC.
It limits how much an individual member can lose in lawsuits against them personally by separating owners' personal assets from company property.
If anything happens, creditors and other claimants would only be able to go after any profits made or assets owned by the company.
Limited liability companies are relatively easy to set up because of how they are regulated. When you form an LLC, it doesn't require all the state and federal filings required for corporations, so it's possible to set up an LLC in a day or two.
LLC members have rights called "membership interests." These rights allow them to vote on how the company is run and how profits and losses are distributed.
The Major Advantages and Disadvantages of an LLC
LLC has several advantages over other business structures (S corporation, C corporation, Sole Proprietorship), but it also has a few drawbacks.
Advantages of LLC
The main advantages of forming a business entity classified as a limited liability company include personal asset protection, flexibility and tax advantages.
1. Personal Asset Protection
Another major advantage when you form an LLC is liability protection since liability belongs solely to the company itself rather than its owners, even as S corporations.
A liability lawsuit against the limited liability company will only affect its assets, not those of any individual owner.
2. Flexibility
Flexibility is a major advantage because limited liability companies can be structured in many different ways.
For example, the liability of members is limited to their investment only, and the S corporations own all assets.
This means that if an LLC goes bankrupt or experiences a lawsuit, the owners' personal wealth isn't at risk because they're limited liability protection and a separate entity.
3. Profit Distribution
One advantage of how LLCs operate is that they can choose how to distribute LLCs ' profits. Members who have voting rights get a share of the company's net business income, which could be in proportion to their membership interests.
4. Pass-Through Taxation
Limited liability companies are pass-through taxation entities, meaning they don't pay federal income taxes.
Instead, all profits and losses "pass-through" the business to each business owner in proportion to their ownership share.
This means lower tax liability for LLC owners than with other types of businesses like corporations or sole proprietorship businesses.
5. Less Paperwork
Unlike other business entities, limited liability companies don't need to file corporate LLC income tax return forms with the Internal Revenue Service. It applies even when it's considered an S corporation.
This means a business owner saves time and money on filing fees and taxes by using Schedule C as a personal form of taxation instead of Form 700 for business returns.
Unlike other forms of organizations like corporations, limited liability companies don't need to file corporate LLC personal income tax returns with the IRS.
Unlike domestic LLC, foreign LLC doesn't require filing the Articles of Organization.
Disadvantages of LLC
The main disadvantages of forming an LLC include operational costs, state regulations and transfer of ownership.
1. Cost of LLCs
The main disadvantage is that starting an LLC is more expensive than a sole proprietorship or partnership. Annual reports and franchise tax fees further contribute to the expenses of the company.
2. State Regulations
LLCs are subject to fees, restrictions and legal requirements which vary from state to state. Professionally run LLCs require additional documentation such as licenses or special permits.
3. Ownership
Since most LLCs are operated, managed and co-owned by the members, any transfer of interest or withdrawal must be approved by a majority, making the process more complex.
FAQs
Why Would a Person Set Up an LLC?
A person would set up an LLC to create a business structure that protects the personal assets of the company's owners from being used in case of bankruptcy or other legal action taken by creditors.
Is LLC Good for Small Businesses?
An LLC is good for small businesses because it is complex and expensive to establish a corporation.
What Are the Financial Benefits of an LLC?
The financial benefits of an LLC include personal asset protection and pass-through taxation. The members' personal properties are protected, and they are not subject to double taxation.
Who Runs LLCs?
LLCs are run by an individual, a group or a legal entity. Limited liability companies can be managed by a member, a hired expert or a managing company.
What is an LLC License?
An LLC license is a legal document that indicates the company is a registered limited liability company with the state it is located in.
Does an LLC Offer Protection for Personal Assets?
An LLC offers protection for personal assets. This means that members are typically not personally responsible for the company's debts and liabilities, safeguarding their personal assets from business creditors.
What is an LLC?
An LLC is a business structure that protects the personal assets of member-owners by separating the finances of the company. The entity itself is not subject to taxes and benefits from pass-through taxation. Any liabilities, debts or legal action against the LLC are settled and limited to the company's assets.
Starting an LLC is a simpler, cost-efficient way for small businesses and new enterprises to establish their company. It is ideal to consult an LLC formation service to ensure you follow legal standards and file required documents.
Reference:
- https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
