1. LLC Benefits
2. LLC Taxation
3. LLC Advantages
4. LLC Disadvantages

An LLC full form comprises an articles of organization, which is the document that registers your LLC. An LLC is essentially a hybrid entity that mixes the characteristics of a corporation with a limited liability partnership. In the same manner as a corporation, an LLC is a distinct entity from the owners. This means that LLCs can do the following under a business name:

  • Get a tax ID number
  • Open a business bank account
  • Conduct business

An LLC is the least complex option when compared to other entities, such as corporations. Creating an LLC also gives owners certain perks, such as:

  • Limited liability protection
  • Pass-through taxation
  • Protection of personal assets

Also, you get the added benefit of appearing more credible in the eyes of the public. An LLC would be the right move depending on your short- and long-term goals. Before you create one, think of the current state of your business and how it can grow in the future. Also, you should grow familiar with LLC advantages and disadvantages of an LLC, and how the entity compares to other entities.

LLC Benefits

Business owners who desire a more flexible structure of the LLC but still want a corporate tax structure can elect to have their LLC taxed as a corporation. To apply for LLC corporate taxation, you must file Form 8832 via the IRS. The election application also makes LLCs eligible for various deductions that are only available to corporate entities.

For additional guidance, you would need to consult with a tax advisor or account in regards to the election process.

Most businesses form an LLC in the state in which they conduct a majority of business. The advantages of home-state registration include:

  • Least complicated process
  • Costs less than creating an LLC in another state
  • Your LLC can avoid paying franchise taxes and submitting annual reports in multiple states

LLCs that intend to conduct business in many states can create an LLC in one state and register to do business in other states thereafter. This would mean that LLCs must do the following:

  • Register to get authorization to do business in that state
  • Submit annual reports and pay annual fees

LLC Taxation

When it comes to taxation, you must keep in mind pass-through taxation. Pass-through taxation allows profits and losses to flow from an LLC to individual members. From there, members would file such losses and profits on their individual tax returns. This also means that LLCs do not pay business income taxes, and the LLC would only file an information-based return. The informational return allows the IRS to know that members are reporting their profits accurately on their personal tax returns.

  • Note: An S corporation also incorporates pass-through taxation.

Pass-through taxation also allows LLCs to get around double taxation associated with C corporations.

Upon creation of an LLC, the owners would need to dispense losses and profits to members based on his or her proportionate investment in the business. However, owners do not have to dispense profit in an equitable fashion, but such an arrangement should be outlined in your operating agreement.

LLC Advantages

LLCs yield the following additional benefits:

  • Legal Protections: LLCs prevent creditors from using the courts to seize personal assets. This is not the case with partnerships and sole proprietorships. Such entities are personally liable for all business debts and obligations, leaving the personal assets of partners at risk. For instance, if an LLC files bankruptcy, members will not be required to pay the debts with personal money. The debt falls with the LLC and not the individuals.
  • Flexibility: LLCs do not have to abide by the same formalities as corporations. For example, LLCs do not have to maintain extensive records, record meeting minutes, and conduct shareholder meetings. Although such formalities would benefit an LLC, the owners are not required to do so.

LLC Disadvantages

Although LLCs come with a wide range of advantages, you must also be aware of the drawbacks:

  • Limited Growth: LLC members cannot dispense stock shares to attract investors and raise capital. LLCs may not be best option if you intend to make your company public in the future.
  • No Uniformity: LLCs tend to be regulated differently by each state.
  • Self-employment Taxes: LLC earnings are open to self-employment taxation, which can be quite hefty.
  • Taxed Appreciated Assets: Such a tax could occur if you turn an existing entity into an LLC

If you have more questions on an LLC full form, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will give you more information on the proper filing procedures and what you need to do to maintain your LLC. In addition, they will provide guidance on establishing the right tax structure for your business so you can save money and use the extra funds to expand your business.