Is an LLC a Legal Entity? Everything You Need to Know
Is an LLC a legal entity? Yes, it is. Limited liability companies, or LLCs, are treated as separate legal beings from their owners.3 min read
Is an LLC a legal entity? Yes, it is. Limited liability companies, or LLCs, are treated as separate legal beings from their owners. It's this separation that provides the owners with important personal liability protection.
What Are Business Entities?
An entity limits the liability of its owner(s). It's a business that's organized according to state law. Entities can be any of the following types:
- Limited partnerships
These business types provide greater personal asset protection compared to general partnerships or sole proprietorships.
If you're not legally separated from your business, you have the potential to suffer significant losses if an angry customer decides to sue you. You could lose money, your vehicle, or even your home if the court rules against you.
However, even a legal entity can't protect you if you don't set it up correctly from the outset. For instance, you can't form a corporate entity while you're being sued and think that it will protect you. In addition, failing to properly maintain your entity can lead to a loss of important protections.
What Is an LLC?
Some people think that LLC stands for "limited liability corporation," which isn't true. LLCs are not corporations. Instead, an LLC is a business structure whereby its owners aren't held personally responsible for business liabilities and debts.
They may be considered hybrid entities that combine some of the beneficial characteristics of partnerships and corporations. Where partnerships are relatively simple business types, corporations have the advantage of certain liability protections.
To create an LLC, you'll file the required articles of organization with your state. This business entity is treated separately from its owners, so it needs its own bank account and tax identification number.
Unlike a corporation, however, LLCs don't pay their own taxes. Instead, LLCs are “pass-through” entities. The business's profits and losses pass through to the owners, and the owners report these amounts on their individual tax returns (similar to sole proprietorships and partnerships).
The main reason most business owners choose to form an LLC is to limit their personal liability. However, this liability protection doesn't always apply. Creditors may be able to “pierce the corporate veil” if business owners commit fraud or when they fail to meet certain legal and reporting requirements.
It's much easier to start an LLC than a corporation. In addition, LLCs provide their owners with more flexibility in operations, along with the liability protection. However, LLCs may not be the right choice when business owners eventually want to run a publicly listed company.
Benefits of an LLC
LLCs don't have to follow the same rigid rules of corporations, and they don't have the same formal structure, but that doesn't stop them from being incredibly useful. Whether you're running a one-person company or you have many employees, an LLC can protect your personal assets while also allowing for growth and expansion.
In an LLC, you don't have to hold special meetings, keep extensive corporate records, or hold to other types of corporate formalities. LLCs allow owners to divide profits and losses in various ways. You don't have to divvy everything up according to strict ownership percentages.
LLCs are also flexible in terms of taxes. You can create a tax plan that works best for you with the many options available. Consult with a tax professional if you need help in this area.
The following can hold ownership in LLC:
There's no restrictions on where LLC owners live.
Although yearly meetings in an LLC aren't required, they're still recommended in order to maintain good communication between members and any managers. It's important to establish your LLC as a separate, stand-alone entity. When you don't follow all requirements for maintaining your business, you run the risk of losing important protections.
Many small business owners in America choose the LLC structure due to its protection, ease, and simplicity of use.
In many states, setting up an LLC is an easy, inexpensive process. Most people are able to do it themselves, without help from an attorney. You can refer to your Secretary of State office (or similar agency) for helpful information on starting your own limited liability company.
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