What Is A Limited Liability Company

What Is A Limited Liability Company

The term Limited Liability Company, also known as an LLC, refers to a certain corporate structure. An LLC is usually easier to set up, and the startup costs are usually considerably lower than a corporation.

LLCs combine attributes of sole proprietorships and partnerships with those of corporations, creating a hybridized business entity. LLCs most resemble corporations in that concept of owners having a certain level of liability protection. They are not held personally liable for the obligations of the corporate entity.

LLC owners handle taxation is more similar to the way partnerships or sole proprietorships are structured. The company does not pay corporate income tax. Instead, the owner pays personal income tax on the company profits.

Understanding Limited Liability Companies

An LLC is a type of business structure which state statues permit to exist. The rules vary from state to state in governing how LLCs operate. Sometimes these variances are minor points and other times they are significant. When discussing LLCs, the terminology used for the owners is generally ‘members.’

Many types of legal entities can be members of an LLC, not just individuals. Corporations can be members of an LLC, as can foreign entities. Even other corporate structures, like another LLC or corporation, can be a member of an LLC. Depending on the state, insurance companies and banks are often barred from being members of an LLC, however.

LLCs are considerably easier to create than corporations while offering equal or even superior protection and flexibility for their members. To create an LLC, it’s necessary to file a partnership agreement with the state in which the LLC is incorporated.

An LLC is not taxed directly, unlike a corporation. Any profits or losses an LLC incurs are dealt with through the tax returns of any of the members of the LLC. One significant implication of this is the fact that in the event of fraud or financial malfeasance. Also, if the LLC is found to have failed in its reporting obligations, creditors can pursue redress with the members of the LCC in question.

Forming a Limited Liability Company

The exact specifics of creating an LLC will vary from state to state. There are enough similarities, however, to be able to broadly characterize the process.

The very first step in forming an LLC is choosing a name for the company. Unlike a sole proprietorship, an LLC will not use the business owners name. Instead, you will create a business name to use on your registration paperwork.

After a name has been selected, the founding members must document and file articles of organization. This details the duties, powers, rights, and liabilities for which the members of the LLC are responsible.

In these articles of organization, the members of the LLC provide their names and addresses. The contact information of the agent representing the LLC is also listed. Also included in the articles of organization is the statement of purpose which covers the LLC’s reason for existence.

In addition to your articles of organization, you will want to create an operating agreement for your company. This is a document outlining the rules, regulations, and financial provisions under which your new business will operate.

Every state requires a registration fee, to be paid when submitting the articles of organization. You will register your LLC with the Secretary of State and pay your filing fee. This will make it legal for you to do business in your state.

Another important aspect of creating an LLC is receiving an EIN (employer identification number). This is a federal designation, and a registering LLC must submit and pay a fee at the federal level to receive their EIN. You will get your EIN when you register for your business license.

One of the foundational concepts of the LLC structure is the notion that individual members are not held personally responsible for the liabilities or debts of the LLC. Beyond that, the regulations governing LLCs can differ depending on the state in which the LLC is incorporated.

Aside from the usual prohibition on insurance companies and banks being able to found an LLC, most other legal entities are permitted to create an LLC in most states. On both a federal and state level, the government does not collect tax revenue directly from LLC as mentioned above.

The Advantages and Disadvantages of Limited Liability Companies

The primary benefit an LLC offers, and the main reason most business people create an LLC is to protect their personal liability if a business incurs debts or liabilities. While LLCs aren’t as robust or complex as corporations, they offer that protective feature while being more similar to a partnership in other ways.

One notable disadvantage to LLCs in comparison with other corporate structures is their relative fragility. For instance, many states will mandate than an LLC be dissolved if a member either dies or goes bankrupt. Compare this to corporations, which can be set up to exist regardless of the personal circumstances of any founder or owner. In any situation where the ultimate plan is for a company to go public, an LLC is probably not the optimal choice.

LLCs Vs. Partnerships

LLCs primarily differ from partnerships in that the business' assets and liabilities are kept separate from their member's personal assets. In a partnership, these assets and debts are not legally considered separated.

LLCs and partnerships are functionally equivalent in how they handle taxation - profits are declared on the personal tax returns of the members of the LLC, and losses may offset other sources of income. This will prevent the double taxation found with most corporation entities. As an LLC your company will not pay taxes directly. Instead, you will pass the profit from your company on to your personal income tax returns.

When an LLC is sold or is transferred to other owners, it’s necessary to create a business continuation agreement. This agreement allows for the LLC to transfer on the death or bankruptcy of a member, but absent such an agreement, the LLC must be dissolved.

Conclusion

In conclusion, small business owners all over America are choosing to start an LLC for their small business. This type of business entity provides many benefits making starting a new business much more feasible for new entrepreneurs.

There are many different types of business from which you can choose to structure your new business. This article has tried to answer any questions you might have on limited liability companies. Do your research as you choose the type of business you want to start.

There are many tax advantages available to you if you choose an LLC over another entity. For tax purposes, you will want to consult your accountant. However, from the aspect of starting your own business and pursuing your entrepreneurial dreams, an LLC might just be the best choice for you.

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