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 IRS calls a "disregarded entity."
It stands for Limited Liability Company, and it's what many small businesses choose to use since it provides them with personal liability protection for their personal assets in the event of legal action against the company.
This blog post will explore what an LLC is and what types of businesses go under this tax status.
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, LLCs 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.
This flexibility makes the LLC a popular choice for business entities of all sizes.
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.
Read More: Sole Proprietorship vs LLC
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.
LLCs are popular business entities because they offer limited liability protection without paperwork and red tape.
An LLC is not obligated to have annual meetings or keep minutes, and there is no need to have a board of directors or shareholders.
An LLC can be formed in most states by filing a simple form with the Secretary of State.
LLC as a Partnership
If you have an LLC with multiple owners (two or more owners), the IRS will automatically treat your new company as a general partnership.
This is great news if you want the liability protection of an LLC and want the tax benefits and ease of operation that come with a partnership.
General partnerships can also file to be treated as a corporation with the IRS if they meet certain requirements.
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 corp 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 an LLC 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?
No. Although an LLC isn't required to start a company, it may be beneficial in many cases.
This legal entity 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?
Yes. LLC is an excellent option for small business owners, more than other business structures.
They are not expensive to set up or maintain, and they are pretty easy to manage.
The only thing that you need to be aware of is whether or not your state has a limited liability state law which might limit your possibilities.
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.
Also, professionals can provide professional services only in their profession, so they must be licensed/qualified.
At the same time, traditional LLCs do not face this limitation as long as they follow IRS's rules about LLCs.
What Type of Business Is Most Likely to Be an LLC?
Any type of business can be an LLC, but small business owners form most LLCs.
Some professions might only allow partnerships, although you can still set up a limited partnership and have the legal protections of the LLC.
These professions include lawyers, doctors, and other professionals required to have a professional license.
What Is the Legal Structure of an LLC?
An LLC is a business entity with a legal structure that offers the benefits of a corporation and partnership while avoiding many of the disadvantages of each.
LLCs are popular because they provide limited liability protection to their owners. The owners' personal assets are separated from the business assets and protected if the company is sued.
How Do LLCs Protect Assets?
LLC owners are shielded from the business debt because the LLC is considered a separate legal entity.
The assets of the business are kept separate from owners' personal property.
This means that if you own an LLC, your "stuff" can't be taken by creditors to pay off debts incurred by your company.
Can You Be Sued Personally With an LLC?
Generally speaking, you can't. However, an LLC can only protect you so far.
If you as an individual commit a tort, you can be held liable.
A tort is a wrongful act or an infringement on another's rights that results in injury to the victim and causes damage for which compensation may be sought by legal action.
For this reason, an LLC owner should never sign any contracts for business loans or credits in their name.
They should also make sure to have at least the minimum level of business insurance, such as general liability insurance if something goes wrong.
What Is an Unlimited LLC?
Unlimited liability is typical for partnerships but less for other business structures.
It implies that each business owner is equally responsible for any debt incurred by the company, most likely because they are unlikely to repay them.
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?
You can easily convert your existing business to an LLC by filing all the legal documents with the State (Articles of Organization/Formation or Certificate of Organization), creating an operating agreement, and appointing a registered agent.
LLC Is What Type of Business...
The LLC is a popular business structure 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 an LLC, it's best to consult a business attorney.
