Full form of an LLC is a flexible, scalable, and simple business structure that combines elements of a corporation and a partnership.

What Is an LLC?

In 1977, Wyoming state conceived the idea of an LLC to satisfy businesses' desire for the partnership-type management and taxation along with the liability protection of a corporation. Once the IRS approved an LLC, the rest of the states adopted this new business structure.

State laws view an LLC as a legal person with rights and obligations, such as the right to do business and the obligation to follow the laws. To avoid confusion, the law distinguishes actual people with the term “natural persons.”

The LLC makes it possible for an individual to invest in a new venture without fearing personal liability.

Though it takes the limited liability feature after a corporation, an LLC cannot exist indefinitely and must be terminated when a member dies or becomes bankrupt.

An LLC is not a good match for companies that want to go public in the future.

LLC Ownership

A member of an LLC can own a percentage of the company or membership units akin to shares of stock. The ownership comes with the voting and profit-sharing rights. An LLC can divide the membership interests however it likes, regardless of each member's contribution.

An LLC can have different classes of ownership interests that vary in distribution of profits and voting power. For example, it is possible to have “super-voting” units with 20 votes per unit and "regular" units with one vote per unit.

Federal and state securities laws regulate the sale of membership interests. If you are working with fewer than 35 investors and are not advertising the sale, you are exempt from most regulations. Otherwise, it's a good idea to consult with a lawyer.

Basic Registration Needs for an LLC

  1. You must register your new business with the secretary of state in the state where your business operates.
  2. Fill out free Tax ID Application on the IRS's website to obtain a tax identification number or an Employer Identification Number. Now you can open business bank accounts, prepare payroll, and apply for business credit and loans.
  3. File the articles of organization, or a certificate of organization, with the secretary of state.
  4. Create an operating agreement to outline the management structure and operating procedures of the company. Though useful even for a company with a single member, operating agreements are most useful for LLCs with multiple members because they list everyone's rights and are useful in case of disagreements.
  5. Appoint a registered agent to accept all the important documents and to deliver them to the members of the LLC. It is imperative for a registered agent to be accessible at the registered office, which could be the LLC's location or the registered agent's office.

LLC Advantages

  • The appeal of the LLC business structure is in its ownership flexibility.
  • In case of a one-person LLC, the owner and the company are separate entities.
  • In case of multiple owners, the owners have a choice of filing taxes as a corporation or as a partnership. The latter option allows to pass the income through to personal tax returns.
  • One of the greatest LLC advantages comes from the EIN, which makes it possible to segregate the owner's personal assets from the business assets. In other words, it provides the owners, or members, with the limited liability benefit that protects them from being personally liable for the business mishaps. If an LLC goes bankrupt, the members won't have to dip into their personal bank accounts to cover its debts.
  • Unlike corporations, LLCs are free from rigorous rules and regulations, like mandatory meetings, detailed recordkeeping, and other protocols, regardless of the number of employees.
  • Flexibility in the tax preparation of an LLC allows you to choose a plan that suits your company best.

An LLC business structure is prevalent in United States because it is simple, easy to operate, and provides protection. The levels of protection and liability depend on the LLC's choice of operating as a corporation, a sole proprietorship, or a partnership.

Disadvantages

  • To preserve its status, an LLC must submit annual state filings.
  • Some states require additional fees and taxes regardless of the profitability of the business, such as California's yearly franchise tax of $800 or more in addition to LLC fees.
  • If you are looking to attract outside investors, keep in mind that investors tend to lean toward corporations over LLCs, perceiving the former ones as more stable.

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