Basics of an LLC

If having an LLC explained is something you desire, then you are probably considering running your business as a limited liability company. A limited liability company is a business form recognized in all 50 states that, like a corporation, is treated as a separate legal entity for running your business.

Separate treatment means that an LLC can have its own tax identification number and bank account and do business in its own name. It also means that the owners enjoy limited liability, meaning that their personal assets will be protected from seizure in the event that business debts or legal rulings require compensation—only business-related assets will be at risk.

Because of this, LLCs are often considered hybrid entities, as they combine an essential element of a corporation—limited liability—with an essential element of sole proprietorships or partnerships—pass-through taxation. Having pass-through taxation means that your business profits will be passed through to your personal income tax and not be taxed at the business level, which can be a major benefit for many entrepreneurs.

Thus, there are many ways an LLC can benefit you, especially if you are just starting out in the realm of business. That said, all elements of the LLC should be examined more deeply before one decides to choose it as their business structure.

Limited Liability Protection and LLCs

Limited liability protection offers LLCs the same kind of legal protection that corporations enjoy. With limited liability protection, LLC members will be protected from civil wrongs, or torts, committed by employees or other members of the company. Such protection comes from the fact that with limited liability protection, representatives of the company are considered to be acting on behalf of the company rather than on behalf of the members of the company. This stands in stark contrast to the situation with traditional partnerships, where the partners can be held liable for both the acts of other partners and the acts of employees.

Taxation and LLCs

LLCs enjoy two distinct advantages where taxation is concerned: pass-through taxation and flexibility. Pass-through taxation means you will only be taxed once for your business profits, thereby avoiding the double-taxation that corporations must deal with. Flexibility means that multi-member LLCs can elect to be taxed as partnerships or corporations and that single-member LLCs can elect to be taxed as a corporation or a disregarded entity, which is essentially a sole proprietorship.

That said, although LLCs can avoid double-taxation, they must still pay the same taxes as all other business types, including sales taxes, property taxes, and business taxes.

Membership Flexibility and LLCs

Along with flexibility of taxation, LLCs also enjoy flexibility of membership. This means that in most states, partnerships, corporations, and other LLCs can become owners of an LLC, and there are also no residency restrictions. On the other hand, corporations must adhere to more ownership restrictions. IRS regulations currently in place prevent corporations from having members that are:

  • Corporations
  • Partnerships
  • Limited liability companies
  • Non-resident aliens

Membership flexibility also pertains to how profits and managerial authority are delegated. For instance, in an LLC, the founders may only put up a small percentage of the initial investment but still retain all the management authority. Similarly, profit-sharing in an LLC need not be proportional to the member’s investment. Thus, LLCs have much more flexibility in this regard than corporations, although such flexibility may lead to future disputes, so the details of profit distribution and authority should be spelled out in the Operating Agreement.

Ownership Transferability and LLCs

Unfortunately, LLCs do not benefit in all aspects of their operation, and one area with downsides is that of ownership transference. In LLCs, the operating agreement may bar the sale or other transference of ownership, and if such transference is allowed, it may only pertain to the economic benefits of ownership and not the voting rights or managerial powers. Additionally, some states may dissolve an LLC if a member declares bankruptcy or dies, and they may hold single-member LLCs to even stricter transfer restrictions.

These are just a few of the details to consider when deciding to go with the LLC structure for your business. If you need further help having the LLC explained, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers. Lawyers on 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.