LLC Entity: Everything You Need to Know
An LLC entity, or more plainly, a limited liability company, is one of the main business types one can choose to run their business as.4 min read
What is an LLC?
An LLC entity, or more plainly, a limited liability company, is one of the main business types one can choose to run their business as. An LLC entity is often described as a hybrid business entity since it borrows the taxation advantages and flexibility of partnerships along with the liability protections of corporations. Taken together, these features help to form a business entity that has great appeal to small business owners and entrepreneurs.
There are many advantages to running your company as an LLC. Some of them include:
- **Limited liability protection. This means that in most cases, your personal assets will not be at risk due to business-related debts or legal issues. Only what interests you have invested in your business will be up for grabs. However, some transgressions, such as fraud, may not be covered by limited liability.
- **Pass-through taxation. For LLCs, profits and losses are not paid on the business taxation level, but passed through to the personal taxes of the LLC members. This allows LLC members to avoid the double-taxation of corporations.
- **Unrestricted ownership. Unlike corporations, LLCs do not have citizenship or residency restrictions. Additionally, business entities, such as corporations, partnerships, and LLCs, may be LLC owners.
- **Versatile taxation. Because the IRS does not recognize the LLC as a tax classification, LLCs can choose how they will be taxed, whether as a sole proprietorship, partnership, C corporation, or S corporation.
- **Versatile profit distribution. LLC members are not required to have their LLC profits distributed in proportions equal to their investment. If they so choose, they can arrange a different distribution model. In contrast, corporations are locked into a proportional distribution model.
- **Few compliance requirements. LLCs have few state filing requirements or operational formalities, while corporations must have at least one annual meeting of the board of directors, keep minutes of that meeting and any other meetings, and adopt bylaws. LLCs have no meeting minutes, or bylaw requirements.
Despite the many advantages of LLCs, they do have some disadvantages. Such disadvantages include:
- **Self-employment taxes. LLC members must pay FICA taxes (Medicare and Social Security taxes). Because of this, in some situations, taxes for LLC members may end up being higher than corporate shareholder taxes, even with pass-through taxation. You may want to consult with an accountant to figure out which tax method is best for you.
- **Greater responsibility for personal records. It is of the utmost importance for an LLC owner to keep their business finances separate from their personal finances. If this is not done, limited liability cannot be ensured.
- **Possibility of LLC termination. In most cases, if a member leaves the LLC, the LLC will be terminated. Corporations, in contrast, exist regardless of individual shareholder membership.
- **Banking requirements. An LLC owner will have to set up a separate bank account for their business in order to keep their personal and business finances separate. There will usually be a number of monthly bank fees for keeping this type of account.
- **Domestic LLC. This is an LLC that was formed in the home state of its owner and operated in that same state. The home state has governing jurisdiction over this LLC.
- **Foreign LLC. This refers to an LLC that operates in a state other than the one it was formed in. So if an LLC was formed in Nebraska but was operating in California, California would consider it a foreign LLC.
- **Member-managed LLC. This is an LLC in which the members handle the day-to-day operations of the business. This type of LLC is the most common.
- **Manager-managed LLC. In this LLC, the management of the business is done by managers, who are often brought in from outside the LLC. This type of LLC is favored by those who would prefer not to deal with day-to-day business issues.
- **Single-member LLC. An LLC with one member.
- **Multi-member LLC. An LLC with multiple members.
- **Series LLC. An LLC that holds a number of smaller entities under it, all of which are considered separate from a legal standpoint. Only eight states allow the series LLC at this time.
- **Restricted LLC. Available only in Nevada, this type of LLC restricts some types of business distributions to 10 years after LLC formation.
- **L3C. This is a for-profit company with a philanthropic purpose. It combines the tax and legal advantages of an LLC with the social advantages of a nonprofit.
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