Limited Liability Company
Selecting the appropriate business structure has long-reaching consequences. You need to research the taxation process, your personal liability protection, and the regulations encountered while forming your business. One of the most common choices for the business structure is a Limited Liability Company (LLC). By now, you may have heard how quick and simple it is to set up an LLC, but still, you need to know whether an LLC is actually the right choice for your business. Read below to know all the details about the Limited Liability Company.
What is a Limited Liability Company?
The LLC is a relatively new type of business legal structure. In an LLC, the company’s members cannot be personally held liable for the company’s debts or liabilities. LLCs combine the traits of both a sole-proprietorship and a corporation. The main feature which makes an LLC a great option is that it is eligible for the pass-through taxation, while at the same time it limits the liability of the owners. An LLC shares many same qualities as an S-Corp or C-Corp while enjoying more flexibility and requiring less paperwork.
Separate Legal Existence
One of the essential characteristics of an LLC is that it has a separate legal existence apart from its members. An LLC is a separate legal entity; it can hire employees, buy and sell property, institute lawsuits and hire attorneys to defend claims against it. The state law concerning LLC operation varies, an LLC can usually continue to exist even after a member withdraws.
The owners or members of an LLC create an operating agreement which is similar to a partnership agreement. It assists in properly operating the LLC. A single-member LLC is taxed as a sole proprietorship, a multiple-member LLC is usually taxed as a partnership. Apart from being owned by an individual or multiple partners, an LLC can also be owned by another business entity, including another LLC or a corporation.
Simplicity in Operation and Documentation
Features such as flexible tax treatment, separate legal existence and protection for personal liabilities. An LLC is characterized by simplicity regarding operation and documentation. For instance, LLC members are not required to appoint a board of directors to run a company. Also, many states do not need an annual shareholders’ meeting and the filing of minutes of that meeting. Record keeping is much easier as compared to that of corporations.
The IRS does not recognize an LLC as a taxing entity. Instead, an LLC is taxed either as a sole proprietorship or partnership, depending on the number of members in the company. In any of the cases above, the individual owners are taxed, not the LLC. The tax passes through the owner’s personal income tax return. If the LLC is owned by a single member, it is taxed as a sole proprietorship. If the LLC is owned by more than one member, it is taxed as a partnership. The members of the LLC can choose to be taxed as a C corporation or as an S corporation.
Advantages of LLC
Protection Against Liability
The main advantage for the members of an LLC is that they have protection against liability. They are not liable for business credits, losses, or debts and their personal assets cannot be recovered by the debtors.
Some business structures limit the number of owners. But, with an LLC, there is no limit to the number of owners. An LLC can have a single member or hundreds of members as owners.
The owner of the LLC has the freedom of picking any form of profit distribution, which means it need not to be in the ratio of the ownership between different members.
Generally, LLCs are not legally required to conduct formal meetings, keep minutes of the meeting, or record resolutions.
Since the pass-through taxation principles apply, and the company itself is not taxed until and unless it opts for continuing as a regular corporation. All business expenses, profits, and losses are accounted by its individual members. Members need to show the earnings in their personal tax returns and pay taxes accordingly. This avoids the double taxation by way of corporate tax payment along with the individual income tax.
Benefits of a Corporation
An LLC can take the advantage of the benefits available for a corporation without going through any incorporation formalities.
Disadvantages of LLC
LLCs need to work hard to find investors and sources of capital due to the larger legal obligations and state filings required to add a new member to an LLC. For instance, If you have a fast-growing internet company that needs investment, this limitation is one of the main disadvantages of a limited liability company.
Since many protections are given to LLCs, some types of businesses are not eligible to file as LLCs. For example, Insurance companies, Banks, and medical service companies are barred from filing as LLC in many states. You can find this out from a business formation lawyer whether you can opt an LLC structure for your business or not.
Though LLC owners are allowed to avoid federal taxes, but your business may end up paying more than that if it would be in a different model. It entirely depends upon on the nature of your business and your state’s personal income tax requirements. Hence, working with a tax lawyer is recommended when planning your business and forming your LLC.
Cannot Go Public
LLCs cannot take a “public” status, as there are no shareholdings. Due to this same reason, issuing shares to employees through stock options is not feasible.
Even though there is less paperwork and the complexities associated with LLCs, but its formation is still considerably more complex than a sole-proprietorship or partnership.
Hence, knowing how LLCs operate and their key advantages and disadvantages is an important step towards establishing a successful business. If you properly plan and structure your company, you can give yourself a better chance of success and avoid disagreements, lawsuits, and other legal issues in the future.