LLC: Everything You Need to Know
An LLC is in essence a hybrid entity that largely combines many of the characteristics found within corporations, partnerships or sole proprietorships. 4 min read
2. Protections of a Corporation
3. Flexibility of a Partnership
4. What Is a ‘Company’?
5. Defining ‘Limited Entrepreneur’
6. What is a ‘Limited Company – LC’?
7. Advantages of an LLC
8. Disadvantages of an LLC
9. Is Creating an LLC Right for Me?
10. What Types of Business Should Choose an LLC
Updated November 25, 2020:
What is LLC?
An LLC, or limited liability company, is a type of corporate formation structure in which all company members are not able to be held personally liable for debts or liabilities that have been incurred by the company. An LLC is, in essence, a hybrid entity that largely combines many of the characteristics found within corporations, partnerships, or sole proprietorships. This limited liability feature can be similarly found in a corporation, while the ability for the LLC to utilize flow-through taxation is a partnership feature.
While the LLC formation structure has many attractive attributes, there are also some disadvantages when compared to the corporation formation structure. If a founding company intends to eventually become a publicly traded entity, an LLC may not be the best option.
Protections of a Corporation
Perhaps, the most significant reason for selecting an LLC is the limitation or protection of the principal members’ personal liability. When one typically thinks of an LLC, the thought of a blended formation structure that combines a partnership and a corporation. In a partnership, a business is formed through an agreement of two or more owners. Take this partnership feature and add the liability protections afforded a corporation and you have an LLC. It should be noted that an LLC is easier to establish than a corporation and afford its member more flexibility while still provided the protections afforded a corporation.
Flexibility of a Partnership
The most recognizable difference between an LLC and a partnership is the fact that an LLC has been designed to ensure that the assets of the business remain from the business owner’s personal assets. This is vital as the resulting effect is to insulate the owners of the business from any of the LLC’s debt obligations or liabilities.
What Is a ‘Company’?
If you are seeking a large personal fortune, forming a company may be the best way to amass such a personal fortune. Many individuals who have amassed the largest personal fortunes in the world have done so by starting their own companies. Aside from the ability to amass great wealth, a company affords income diversification, the ability to see the correlation between great effort and great reward as well as flexibility and the ability to create freely.
Defining ‘Limited Entrepreneur’
A limited entrepreneur is very similar to a limited partner in a partnership context. Like limited partners, limited entrepreneurs typically do not have an active role in the management of the company nor are they held ultimately responsible for any company debt incurred. Also, any income or losses received by a limited entrepreneur will be considered passive under the tax code.
What is a ‘Limited Company – LC’?
Formation of a limited company affords the company the ability to keep its debts separated from any shareholder debt. This is extremely important in a time of financial distress for a company as the shareholders' assets will not be at risk of seizure by creditors given the limited company formation.
Advantages of an LLC
There are several advantages of an LLC. Here are a few:
- LLC owners are not required to file corporate tax returns with the IRS. Rather, LLC owners will report any profit or loss on an individual return and thus will avoid any possible double taxation.
- LLC owners are not required to have permanent resident status, nor are they required to be citizens of the United States.
- Limited liability for any debts or obligations of the business is afforded to LLC owners.
- An LLC formation structure may be viewed more favorably in the eyes of partners, suppliers, and lenders.
Disadvantages of an LLC
There are several disadvantages of an LLC. Here are a few:
- By forming an LLC, owners are precluded from issuing any company stock, which would attract investors.
- LLCs may receive different treatment in different states.
- LLC earnings cannot be shielded from taxation.
Is Creating an LLC Right for Me?
To determine whether an LLC is the right formation structure for your company, you must lay out your short-term and long-term goals to make that determination. Understanding how your business functions now and the growth you envision for your business are prerequisites to determining whether an LLC is right for you.
What Types of Business Should Choose an LLC
As previously discussed in the advantages and disadvantages section, if your business does not plan on raising capital through a stock offering, you feel that you would like to protect your assets while allowing for flexible management and tax structure, an LLC may be the preferred formation structure for your business.
If you are currently a sole proprietor, member of a partnership, or currently a corporation with several members, an LLC could be a sensible choice for any small business, given that the structure provides limited liability protection offered in a corporation structure without the complexity and formality often found in a corporation.
If you need help understanding an LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent to its site. Lawyers from UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.