Definition of LLC: Everything You Need to Know
The definition of LLC is a distinct legal business entity that gives members certain liability protections and tax advantages.3 min read
Definition of LLC
The definition of LLC is a distinct legal business entity that gives members certain liability protections and tax advantages. It is a legal business entity that was created to protect the personal assets of business owners. It combines the liability advantages of a corporate entity with the flexibilities of a partnership. For instance, the partnership structure within an LLC offers pass-through taxation.
According to IRS guidelines, LLC owners contend with low caps on business debts and actions. If an LLC incurs unpaid debts, creditors cannot go after personal assets of business owners, but only business assets. LLCs must be formed via corporations or individuals who can legally create an LLC entity.
LLCs come in many forms, such as corporations and partnerships. If multiple individuals create the LLC, it is called a partnership LLC in regards to federal taxation. With that, the IRS allows partnership LLCs to change into a standard corporation if members submit Form 8832. If a person creates an LLC, the business is therefore considered a different entity. For tax reasons, you need to file in the following forms, depending on the LLC type:
- Sole proprietorship
LLC Advantages & Disadvantages
LLCs offer the following advantages:
- Pass-through Taxation: When it comes to pass-through taxation, you do not need to file a business tax return. LLC owners note loss and profit shares on individual tax returns, allowing you to get around double taxation
- No Residency Restrictions: LLC members do not need to be permanent residents or U.S. citizens.
- Legal Safeguards: Forming an LLC gives you safeguards from business obligations and debts.
- Increased Credibility: Suppliers, lenders, and partners view LLCs with more credibility than other entities, such as sole proprietorships and partnerships.
- Fewer Formalities: LLCs are not subject to extensive record-keeping and special meetings like corporations.
On the other hand, LLCs offer the following disadvantages in the form of:
- Limited Growth: LLCs cannot dispense stock to investors.
- No Uniformity: LLCs are regulated differently depending on the state.
- Self-Employment Taxes: LLC earnings are open to self-employment taxation.
- Tax-Appreciated Assets: This could occur if you turn an existing entity into an LLC.
- Limited Lifespan: An LLC must be dissolved if a member files for bankruptcy or dies. This is not the case with corporations, where the entity exists in perpetuity despite the death or financial situation of the member.
- Public Limitations: An LLC may not be the best option if you want your company to become public in the future.
When creating an LLC, you must first create a business name, and you may reserve it if your state permits name reservation. Then, you would draft and register your articles of organization with the secretary of state of your respective state. After, you should decide who manages the business, such as managers or members, and you need to determine how many owners will be associated with the LLC.
Once your business gets established, you need to apply for certificates and licenses that are specific to your field. You would also need to register for an Employer Identification Number (EIN). You can get an EIN at the IRS website. You may also need to apply for additional ID numbers by various local or state agencies.
The tax requirements vary based on jurisdiction, but you generally need to pay the following taxes:
- Payroll taxes
You also need tax ID numbers to pay the aforementioned taxes.
S corporations may only issue one type of stock, while LLCs can offer different share classifications with various rights. S corps are also restricted to a 75 shareholder maximum, and they must be U.S. citizens or residents. On the other hand, LLCs allow an unlimited number of partnerships, corporations, and individuals as members.
Unless a member within a limited partnership takes an active role, the losses are considered passive and cannot be used to offset active income and deduct taxes. With that, if a member is actively involved in management, that person can be held liable for any business debts. LLC owners, however, cannot take on liability for business debts, and LLC losses are tax-deductible in regards to active income.
To learn more about the definition of an LLC, post your legal needto our UpCounsel marketplace. UpCounsel lawyers will help you determine if an S corp, partnership, or LLC is the right choice for your business goals. In addition, they will help you obtain the necessary permits and licenses for your business, and they will provide more information on maintenance procedures you need to be aware of.