A limited liability company (LLC) is a popular choice among small business owners for the liability protection, management flexibility, and tax advantages this form of business entity often provides. The versatility of LLCs make them an incredible opportunity for business owners.
What is an LLC?
A Limited liability company (LLC) is a business structure that offers limited liability protection and pass-through taxation. As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, owners cannot typically be held personally responsible for the business debts and liabilities. The LLC allows for pass-through taxation, as its income is not taxed at the entity level; however, a tax return for the LLC must be completed if the LLC has more than one owner. Any LLC income or loss as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.
Benefits of Forming an LLC
LLCs are hugely beneficial for a few specific reasons:
Members can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members.
Members (which is what the owners of an LLC are called) are shielded from personal liability for acts of the LLC and its other members. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. The personal assets of sole proprietors and general partners, on the other hand, can be pursued against the business’ debts.
Members can manage the LLC or elect a management group to do so. Corporations, on the other hand, are managed by a board of directors, not shareholders. When an LLC is managed by members, owners oversee daily business operations.
LLCs typically do not pay taxes at the business entity level. Any business income or loss is “passed-through” to owners and reported on their personal income tax returns. Any tax due is paid at the individual level.
Starting an LLC may help a new business establish credibility more so than if the business is operated as a sole proprietorship or partnership.
LLCs face fewer state-imposed compliance requirements and ongoing formalities than sole proprietorships, general partnerships, or corporations.
How to Form an LLC
Although the requirements for LLCs vary by state, there are generally some commonalities. The very first thing owners or members must do is to choose a name. Articles of organization can then be documented and filed with the state. These articles establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC. Other information included in the documents includes the names and addresses of the LLC’s members, the name of the LLC’s registered agent, and the business’ statement of purpose.
The articles of organization are filed, along with a fee paid directly to the state. Paperwork and additional fees must also be submitted at the federal level to obtain an employer identification number (EIN).
Limited liability companies (LLCs) are important legal structures for forming a business. Limited liability means that the assets and debts of the business remain separate from the personal assets and debts of the company’s owners. If a company goes bankrupt, creditors cannot therefore go after the owners’ personal assets, just that of the business. LLCs also have several beneficial features including simplified taxation and a relatively straightforward process to establish one. This is part of the reason why LLCs are the most common type of business in the U.S.