What Type of Business is an LLC? | All You Need to Know
A limited liability company (LLC) represents a type of business structure that can be used by any company, whether it's a one-person operation or what the Internal Revenue Service (IRS) calls a "disregarded entity."
With over a decade of practice as a business consultant for limited liability companies, I helped clients across various states regarding the formation, organization, and management of LLCs.
As my specialty, I will provide a comprehensive article on what type of business an LLC is, its business structure, types, and the advantages of forming one.
Quick Summary
- An LLC can be defined as a business structure that covers its owners or members from any liabilities.
- The structure of a limited liability company can be as a corporation, partnership, or sole proprietorship.
- A limited liability company enjoys an array of tax benefits when compared to other business structures.
What type of business is an LLC?
An LLC, popularly known as a limited liability company, is a business structure that covers all its members or owners from any liability incurred by the business.
No debts or any obligation can extend to the personal properties of the LLC owners unless under special circumstances, stated by each state.
Additionally, an LLC isn’t limited to a single member. Anyone can become part and parcel of an LLC, provided they believe in themselves.
What Does an LLC Offer to Its Owners?
Limited liability companies offer business owners several important protections. For example, their personal assets are typically protected if they go bankrupt.
This is essential protection for business owners who want to ensure that they will not lose their personal possessions, such as cars or homes.
Additionally, limited liability companies offer tax benefits and can be less expensive than other business structures.
Pass-through taxation LLCs offer one of the ways to circumvent double taxation by reporting their personal income on personal tax returns.
This means that the company's income is not taxed separately - once at the corporate level and once again when distributed to shareholders, which is the case with some types of corporations.
LLCs are also less expensive to set up than other business structures, such as corporations.
This can be a significant advantage for businesses just starting and do not have much money to spend.
LLC Structure
A limited liability company is a business entity that offers a lot of flexibility regarding how it is structured.
The LLC can be set up so that the owners are personally liable for the debts and obligations of the business, or it can be structured so that the owners have limited personal liability [1].
This flexibility makes the LLC a popular choice for business entities of all sizes.
1. LLC as a Sole Proprietorship
Sole proprietorships are business entities owned and operated by a single owner.
The owners of a sole proprietorship are personally responsible for all debts and liabilities incurred by the business.
There is no separation between the business and the owner, so the owner's personal assets can pay off any business debts.
If you set up your business as a single-member LLC, the Internal Revenue Service will instantly regard it as a sole proprietorship. Still, you will have the protection of limited liability.
Sole proprietors report personal income tax on their tax returns.
Sole proprietors have to pay self-employment taxes, which are the equivalent of Social Security and Medicare, on both incomes earned by the business and personal investment income.
2. LLC as a Partnership
If you have an LLC with multiple owners (two or more owners), the Internal Revenue Service will automatically treat your new company as a general partnership.
This is great news if you want the liability protection of an LLC and the tax benefits and ease of operation that come with a limited liability partnership.
General partnerships can also file to be treated as a corporation with the IRS if they meet certain requirements.
3. LLC as a Corporation
Single-member and multi-member LLCs can be treated as corporations (a C or S corporation). However, these tax elections come with some strings attached.
A C corporation LLC is taxed like a traditional corporation. If that's the case, the LLC files a tax return and pays corporate taxes (federal and state taxes) at a corporate rate.
Profits are reported on corporation owners' personal income tax returns, but a limited liability company can choose how it wants its profits and losses allocated among members.
An S corp LLC is taxed like a partnership (default), with all the corporate profits or loss passed through to owners.
S Corps are classified as pass-through businesses because business income and losses pass through to the corporation's owners' individual tax returns.
An S corporation's earnings and deductions are reported similarly to a partnership's.
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FAQs
Do I Need an LLC to Start a Business?
You don't need an LLC to start a business. However, an LLC offers many advantages for many small businesses, which greatly outweigh the expense and effort required to form one.
Is LLC the Best for a Small Business?
An LLC is the best for small businesses because they are not expensive to set up or maintain, and they are pretty easy to manage. It is important to note that different states have varying laws regarding the formation and requirements to establish an LLC.
What Is the Main Difference Between a Professional and a Regular LLC?
The main difference between a professional and a regular LLC is that owners of the former must have licenses, whereas the latter doesn't need them.
What Type of Business Is Most Likely to Be an LLC?
Any type of business can most likely be an LLC, but it has to be legally established according to state laws.
What Is the Legal Structure of an LLC?
The legal structure of an LLC is the separation of the company's assets from the personal property of its members. LLCs are popular because they provide limited liability protection to their owners.
How Do LLCs Protect Assets?
LLCs protect assets by shielding the owners from the business debt because the LLC is considered a separate legal entity.
Can You Be Sued Personally With an LLC?
You can't be sued personally with an LLC because the company is regarded as an isolated entity. However, if you use personal assets or enter into contracts as an individual rather than a representative of the company, you may be legally liable.
What Is an Unlimited LLC?
An unlimited LLC implies that each business owner is equally responsible for any debt incurred by the company.
For this reason, most firms choose the middle ground - limited partnership, because each partner is held liable for no more than the amount of money they invested in the partnership.
How Do I Change My Business to an LLC?
To change your business to an LLC, file all the legal documents with the State (Articles of Organization/Formation or Certificate of Organization), create an operating agreement, and appoint a registered agent.
What Kind of Records Does an LLC Need to Keep?
An LLC needs to keep a variety of records, including the operating agreement, meeting minutes, financial documents, and tax filings, especially if the LLC has elected S Corporation status. Compliance varies by state law.
Why Choose an LLC Business?
You should choose an LLC business because it offers limited liability protection while still providing the tax benefits of a partnership or sole proprietorship.
The LLC can have an unlimited number of members, so it's great for larger businesses or other business entities that want to join forces.
If you still have questions about starting a limited liability company, it's best to consult a business attorney.
References:
- https://smallbusiness.chron.com/limited-vs-unlimited-liability-companies-68397.html
