What Is an LLC? Financial Treat – A limited liability company or LLC is a legal entity in the United States designed to own, operate, and protect a business. LLCs offer the same legal and financial protections as corporations, but are easier to operate.
Other common corporate forms, including corporations, partnerships, and sole proprietorships, offer different advantages, but LLC entities combine the advantages of each structure.
The main advantage of an LLC is the name: limited liability protection. When an owner uses an LLC to conduct business, the owner’s personal assets are protected from business debts and lawsuits against the company. An LLC can have one owner (called a “member”) or multiple members. Both companies and individuals can become members of an LLC.
LLCs also offer more flexibility than other company types in terms of how taxes work. LLCs are automatically taxed as either a sole proprietorship or a partnership, depending on whether they have one or more members. Members report their share of business income and expenses on their personal tax returns and pay personal income tax on profits. Members who work for the company are considered self-employed and must also pay self-employment taxes (Medicare and Social Security) on their share of profits.
If the company does not wish to be taxed as a sole proprietorship or partnership, the LLC can also choose to be taxed as an S corp or C corp. Corporate taxes allow LLC owners to get paid as company employees, participate in company benefit programs, and potentially save on taxes. C-Corp pays corporate income tax, and its owners pay taxes on the distributions they receive. An S Corp is a pass-through entity – it pays no corporate income tax, but each owner pays personal income tax on their share of the company’s profits. But not all LLCs are eligible for S Corp taxation. – They must meet IRS requirements.
LLCs are not required to hold annual general meetings or maintain a board of directors, nor are they subject to the administrative regulations common to corporations. In contrast, members of an LLC can be organized as they wish: members or managers can manage the affairs of the company as they see fit.
State law generally does not allow you to incorporate a new business with the same name as an existing business. Forming an LLC gives you the exclusive right to use your name as a business entity name in your state, and you can also create a public record of your use of that name. An LLC nickname at the end of a company name can also add credibility to a small business.
One of the benefits of a multi-member LLC is that members can choose how to share profits. Corporations issue stock dividends based on the number of shares they own, and partnerships typically distribute profits among the partners, but LLCs can choose how to share, undivided, or otherwise distribute profits. Note, however, that IRS rules regarding the specific distribution of profits may require profit sharing to reflect ownership percentages or legitimate economic needs or circumstances—rather than any attempt to avoid paying taxes.
The first major disadvantage of an LLC is cost, especially for small businesses.
LLCs are formed and registered at the state level, so the process—and the fees involved—may vary by location. Setting up an LLC can cost a few hundred dollars. Many states require LLCs to file annual reports and pay annual fees and taxes, which can range from $10 to $800 or more.
While LLCs have “members” who own the company, LLCs do not issue stock in the same way as corporations. Membership in an LLC is not as easy to transfer from one party to another as company shares. There is nothing to the contrary in an LLC’s operating agreement, and some states require LLCs to be dissolved when there is a change in ownership. Because of this, many companies find that their corporate structure is more conducive to outside investment. LLCs offer great flexibility in how the company organizes, manages, and conducts affairs, but companies with a high need for outside investment may find another structure that is more conducive to these forms of financing.
Forming an LLC offers great benefits to most small and medium business owners. Registering and operating as an LLC provides business owners with legal protection for personal property, goodwill, and a long list of other benefits that are typically only found in many other business structures.
LLC registration and filing costs vary from state to state, as do the taxes levied on LLCs. Hiring a lawyer to form an LLC can often be expensive, but may be necessary for companies with more complex structures or many members. Forming an LLC costs between $50 and $200 in most states, but some states cost as much as $500. If you hire someone to help you with the process or act as your registered agent, you will have to pay extra.
A foreign LLC refers only to companies operating in states other than the state in which they were incorporated. This is especially common for companies located in cities near state lines that may want to expand across the border. Operating in multiple states may require the LLC to register documents, pay taxes, and obtain other licenses in each state. Since each state has its own set of laws governing LLCs, companies must ensure they comply with all of these laws.
No attorneys are not required to file and register an LLC in a specific state. For more complex business structures and those who want to make sure no mistakes are made, hiring a lawyer may be a smart move. However, generally speaking, you do not need to hire a lawyer to form an LLC. If you want legal assistance at an affordable price, consider hiring one of the best LLC services.
LLCs offer some advantages of corporations and vice versa, but LLCs and corporations are two different business entities and not the same thing. Learn about LLCs vs. corporations to determine which structure is best for your business.
Yes. LLCs can offer tax benefits depending on how the company chooses to be taxed, but LLCs do not protect anyone from having to pay taxes on company profits. Some states may impose additional taxes on LLCs, and many impose an annual registration and filing fee.
LLCs are not public liability insurance and do not offer the same benefits. While an LLC protects you from personal liability for most business debts, liability insurance can protect you if someone claims your business caused injury or property damage. In addition to the legal protection personal property can get from an LLC business structure, liability insurance is also desirable for businesses.
Chauncey grew up on a farm in rural Northern California. At 18, he ran away with a backpack and a credit card, saw the world, and discovered that the real value of every penny or mile is in the experience it brings. He’s most comfortable in a tractor, but he knows that opportunity is where he finds it, and it’s more fun than complacency.