LLC is What Type of Business: Everything You Need to Know
LLC is what type of business is a question frequently asked by entrepreneurs who are considering forming a formal business entity. 3 min read
LLC is what type of business is a question frequently asked by entrepreneurs who are considering forming a formal business entity. An LLC, or limited liability company, protects your personal assets from business debts and obligations. The LLC is governed by state law, and business profits and losses are reported on the individual tax return of each owner, known as a member.
Is an LLC Right for Me?
You may want to consider forming an LLC if:
- You are a start-up company anticipating losses for at least the first two years in business and want to pass these losses on to yourself and other owners, if applicable.
- You want flexibility in the accounting method you use.
- Your business owns real estate.
- You want a flexible management structure.
- You want to avoid formalities such as appointing a board of directors, holding annual meetings, and keeping detailed meeting minutes.
- You want profit-sharing flexibility.
How Is an LLC Established?
To create an LLC, you'll need to register with the secretary of your state by submitting articles of organization. You must choose a name for your LLC that includes the words "limited liability company" or "LLC" and that is not already in use by another business in your state.
You'll need to decide whether your LLC will be managed by yourself or another member. You can also hire a professional manager to handle the day-to-day business operations.
How Is an LLC Taxed?
If you have a single-member LLC, you are taxed as a sole proprietor by default and profits and losses pass through to your individual tax return. Multiple-member LLCs are subject to partnership taxation. You can also opt to have your LLC taxed like a standard C corporation or an S corporation.
What Are the Advantages of Forming an LLC?
An LLC is a popular structure among small business owners because of its many advantages, including:
- Pass-through taxation, which allows you to avoid the double taxation that affects corporations. Corporate profits are taxed both at the individual level and at the corporate level, while LLC profits are only taxed at the individual level.
- LLC members do not need to be permanent residents or U.S. citizens. An LLC can be owned by another corporation or entity as well as by individuals.
- Your personal assets are protected from business debts and obligations.
- Potential and existing clients, lenders, suppliers, and partners may hold a business with an official legal structure such as an LLC in higher esteem, thus increasing your credibility.
- An LLC can also choose to be taxed as a C or S corporation depending on what is most advantageous.
- An LLC enjoys flexible profit distribution. Unlike with a corporation, in which profits and losses must be distributed in accordance with each shareholder's ownership percentages, an LLC can allocate profits and losses in different proportions if desired.
- LLCs are subject to fewer state filing requirements and formalities compared with corporations. They can hold meetings and create documentation as desired but are not legally required to do so by the state.
Are There Disadvantages of Creating an LLC?
You may want to reconsider forming an LLC for these reasons:
- LLCs cannot attract investors by issuing stock shares.
- An LLC is treated differently in different states, which may cause issues for those who do business in more than one state.
- LLC earnings are subject to self-employment tax.
- If you convert a different type of business to an LLC, appreciated assets may be taxed.
- Although LLCs avoid double taxation, the individual tax rate is often higher than the corporate rate.
- You will still need to pay FICA (Medicare and Social Security) taxes on behalf of employees.
- You need to keep careful financial records to prove that personal and business accounts are separate in order to preserve your limited liability protection.
- If a member leaves the LLC, the entity will be terminated.
- Business bank accounts may be subject to higher fees than personal accounts are.
If you need help with deciding whether an LLC is the right choice for your business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. 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.