LLC Description: Everything You Need to Know
Understanding LLC description is one of the most important parts of making the decision to form your business under this type of structure.3 min read
2. Protections of a Corporation
Understanding LLC description is one of the most important parts of making the decision to form your business under this type of structure. LLCs are an ideal option for many start-ups and established businesses, alike.
What is a Limited Liability Company (LLC)
An LLC, or a limited liability company, is a business structure where members of the company are not held personally liable for company debt. If a business is structured as an LLC and it files for bankruptcy, the members of the LLC are not going to pay back any business debt with their personal cash. If the business is not left with enough money to repay creditors, they cannot come after the owners and members for a payment. That debt was debt from the business, not those who own the company.
An LLC is a type of hybrid operation that combines the beneficial components of corporations and sole proprietorships. Business liability is handled in both business structures, but there is some additional flow-through taxation for the LLC owners that is similar to a sole proprietorship.
While an LLC does have some enticing benefits, there are some disadvantages as well, particularly when compared to corporations. For example, an LLC must be dissolved if a member passes away or files for bankruptcy. A corporation will essentially last forever if they do not choose to close.
LLCs are not always an ideal option when you want to eventually transition into a publicly traded company. Similar to corporations, an LLC is a completely separate legal structure. The LLC can obtain a tax identification number and do banking business on its own.
There are some differences between S corporations and LLCs that you need to consider:
- When it comes to S corporations, LLCs do provide several advantages in comparison. S corporations can issue one class of stock in the company. An LLC is able to provide different classes that hold different rights. Also, S corporations have limitations on the number of shareholders; 75 individuals who have to be residents of the United States. LLCs may have an unlimited number of members.
- LLCs also have tax advantages over a limited partnership business structure. If a partner in a limited partnership does not hold an active role in the business and he or she suffers losses, those losses are going to be looked at as passive in nature. They cannot then be used as a tax write off to help offset his or her active income. However, if the partner assumes a leadership role in the management of the business, he or she will have to be liable for the debt of the firm.
- On the flip side, owners of LLCs will not have the burden of the business’ liability and debt, and all losses suffered by the LLC may be used as a tax write off against his or her active income. However, all who are owners in an LLC must pass the “transferability restriction test.” This test simply determines the ownership interest and that they are not transferrable, with no restrictions. The restrictions mean that LLCs are not ideal for large corporations.
- A corporation needs to attract money in large sums, so the corporate stock has to seamlessly transfer in the stock exchange. The restriction is not a problem for smaller start-ups. The transfer of stock ownership does not happen often.
- LLCs are newer business structures in comparison to corporations. The federal and state government are still discovering ways that they can be regulated. Sadly, there are investment promoters that will utilize an LLC to hide from securities law. This is why you must work with your lawyer and accountant when you are contemplating which business structure you want to form.
Protections of a Corporation
The main reason many business owners choose an LLC is to decrease the owner’s personal liability. LLCs are seen as a combination of partnerships, which are simple businesses of two people or more that work within an agreement, and corporations, which are provided with liability protection.
LLCs are more formal than partnerships because they have to file articles of organization. They are easier to set up than corporations and are much more flexible. However, a creditor may pierce the corporate veil of an LLC when there is fraud or if required reporting has not happened.
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