LLC Business Forms: Everything You Need to Know
Limited liability company (LLC) business forms are numerous and before you start an LLC, it's important to know the pros and cons of forming one.3 min read
Limited liability company (LLC) business forms are numerous. Before you start an LLC, it's important to understand which types of businesses are best suited to an LLC election and the pros and cons of forming an LLC.
What Is an LLC?
LLCs have less complex and more flexible business structures than corporations, making them a popular choice for new and small businesses and entrepreneurs. Like sole proprietorships and partnerships, LLCs benefit from pass-through taxation. This means the LLC does not pay any federal taxes. Instead, the owners claim the company's income and losses on their personal income tax returns.
As an LLC, your business acts as its own legal entity. It offers the same limited liability as a corporation and provides legal protection for your personal assets. The LLC incurs all debts and liabilities instead of the business owners. As an owner, your liability relates directly to the personal interest you invest in the LLC. It's a win-win situation for business owners.
LLC owners are known as members. An LLC can have one or more members. The choice is yours. Forming an LLC helps make your business seem more credible than the competition.
What Types of Businesses Should Choose an LLC?
An LLC is a good fit for your business if you need to protect your assets, require flexibility with taxes and the way you manage your business, and are not looking to bring on investors to fund the business. However, not all types of businesses can form an LLC.
Most financial institutions do not qualify for LLC status. Banks, insurance agencies, and financial trust companies are all examples of businesses that cannot form an LLC.
In some states, there are also restrictions on the types of industries that can form an LLC. Accountants, architects, and licensed healthcare providers cannot form an LLC in California, for example. They can form a professional corporation (PC) instead.
In addition to limited liability protection and pass-through taxation, there are many advantages to forming an LLC. They include:
- Allowing foreign nationals to own the LLC, not just U.S. citizens or residents.
- Permitting corporate entities, such as other corporations or LLCs, to own the LLC.
- Choosing if the LLC will be taxed as a C or an S corporation.
- Having the flexibility to allocate the LLC's profits and income in a way that is not proportionate to a member's ownership percentage, unlike corporations that must distribute profits relative to each shareholders ownership.
- Being subject to minimal annual filing requirements and formalities, such as having the option not to adopt bylaws, hold annual director and shareholder meetings, or keep minutes of meetings and formal resolutions in the same way that corporations must do so.
- Placing the LLC in a living trust to reap estate planning and tax benefits.
While there are many advantages to forming an LLC, there are also several disadvantages. They include:
- Being taxed at a higher rate as a pass-through entity.
- Paying for federal inclusions, such as health insurance and social security.
- Keeping accurate and detailed records of business expenses that are separate from personal financial records to ensure limited liability.
- Maintaining separate business and personal bank accounts and debit and credit cards.
- Terminating the LLC so that it no longer exists when a member leaves the business.
- Preventing members from issuing stocks to draw in new investors.
- Being treated differently from one state to another.
- Being subject to tax recognition on appreciated assets for an existing business.
Who Can Form an LLC?
In nearly every state, almost anyone can form an LLC, regardless of the size of their company and the number of members it has. Massachusetts is the only exception. In that state, your business needs at least two members to form an LLC.
Even though you can have any number of members, most LLCs have fewer than five. Keeping the LLC small makes it easier for members to work together and come up with a shared vision for the company.
Having a good understanding of LLC business forms is important when deciding what type of business entity is right for your company. There are many advantages to LLCs, especially if you own a new or small business or are an entrepreneur.
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