Full Meaning of LLC: Everything You Need to Know
The full meaning of LLC is much more complex than its full name. By forming an LLC, companies must adhere to specific guidelines and regulations.3 min read
The full meaning of LLC is much more complex than its full name (limited liability company). By forming an LLC, companies must adhere to specific guidelines and regulations, since this business structure differs from a corporation. Since an LLC is a hybrid entity, forming one results in a wide range of benefits, both in terms of liability protection and taxation.
Basically, an LLC offers a corporate structure, combined with characteristics of a partnership or sole proprietorship. This means that the owners, which are called members, will not be held liable for the company's debts or liabilities.
An Introduction to LCC
In 1977, the state of Wyoming saw a need and, in response, invented the LLC. This business structure was intended for businesses that wanted to be both taxed and managed like a partnership while obtaining liability protection like a corporation. Once the IRS agreed to this new structure, all of the states in the union began to pass similar laws.
An LLC, also known as a limited liability company, is considered to be a legal person. This means that as a person, an LLC automatically has a number of obligations and rights. For example, an LLC has a right to do business but also has an obligation to follow state and federal laws.
What Is an LLC?
Today, many businesses choose to be structured as an LLC. Being a newer structure, this type of business offers many benefits based on the needs of the modern business owner. Although LLCs are recognized in all states, they are specifically governed by the state in which they're formed.
When forming this type of business, members cannot be held responsible for the company's liabilities and debts. Being a hybrid entity, an LLC essentially combines aspects of a sole proprietorship or partnership and a corporation. By selecting this business structure, members enjoy pass-through taxation.
Although there is no limit on the number of members an LLC can have, a limited liability company can be started by just one individual. Regardless of the number of members, each one can participate in the company's daily operations while enjoying limited liability.
When forming an LLC, owners must obtain an EIN — also known as an employer identification number. This free number, obtained from the IRS, is a unique business number, equivalent to an individual's social security number. This number, along with your registration paperwork, will also be required when opening a business bank account.
Ownership Percentages of an LLC
For members of an LLC, ownership can be expressed in one of two key ways:
- By percentage
- By membership units, which is similar to a corporation's shares of stock
How ownership is distributed is up to the members involved. This type of business can also be organized based on varying classes of ownership interests. This offers added flexibility based on how the company is structured and run. If at any point you decide to sell membership interests or you plan to raise a significant amount of money, it is recommended that you seek the assistance of an attorney.
There are a number of reasons why forming an LLC is such a popular choice. In comparison to partnerships, sole proprietorships, and S corporations, LLCs benefit from various tax advantages. Taxed as a "pass-through" entity, all of the company's profits are reported on the personal tax returns of each member. How much each member reports will be based on their percentage of ownership. The same is true regarding any deductions, credits, or losses.
Unlike corporations, when it comes to an LLC's shareholders, there is no maximum number. Members can also be foreign citizens. These members enjoy increased protection, as their personal assets are typically at risk. So, whether you would like to avoid double taxation or enjoy greater flexibility in regards to management, forming an LLC is definitely something to consider.
Although there are also a couple of disadvantages, such as additional state filings, LLCs in general, are an ideal business structure. If you would like to transition to an LLC, it is recommended that you seek legal advice. This is particularly the case when multiple owners are involved.
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