Definition of a Limited Liability Company or LLC

The abbreviation LLC meaning is Limited Liability Company and it is a term used to designate the type of business entity filed by a company. The LLC was created to give business owners less liability when running a company. Liability as it relates to owning a business, refers to the legal and financial expectation of owners. The LLC designation protects owners from being personally liable for business debts and obligations.

Like corporations, Limited Liability Companies are considered separate and distinct entities in the eyes of the government and legal organizations. This separation allows LLCs to get their own tax identification number, take out business loans, and set up bank accounts all independent of the owner.

Many business owners create LLCs because of the personal protection it provides. Regardless of the debts and liabilities of the LLC, the owners will not be held personally liable. For instance, if the LLC has to file bankruptcy, the owners will not be asked to pay the LLC’s debts personally, even if the company’s assets cannot cover the debt.

Forming an LLC

In most states, you can form an LLC by completing a document known as “Articles of Organization.” The Articles of Organization are usually filed with the Secretary of State or your state’s tax office.

LLCs are not universal and each state has unique definitions and qualifications for an LLC. Generally speaking, Limited Liability Companies must be formed by individuals or corporations who are legally able to form a business.

When forming an LLC, it’s important to know what type of LLC you need to file. If you have multiple people creating the LLC it is considered a Partnership Limited Liability Company (PLLC). If you file an LLC as an individual, then it would be your standard LLC. Each LLC designation has different tax options. You can file your taxes like a proprietorship, corporation, or partnership.

It’s important to note that certain types of companies cannot form an LLC. For instance, banks and insurance companies cannot form LLCs. To learn more about the requirements of LLCs in your state, look on the Small Business Association’s website. 

Benefits of a Limited Liability Company

Many business owners choose a Limited Liability Company classification because of its favorable tax breaks, personal liability protection, and overall ease and convenience.

The tax benefits of Limited Liability Companies cannot be stated enough. The IRS allows LLC owners to recognize company gains and losses on their individual tax return. This tax method is known as “pass-through” and it allows owners to have profits taxed at the owner’s personal rate as opposed to a corporate tax rate. There are also a lot of flexibility with tax requirements for LLCs. The pass-through method also allows the owner to record losses as deductions or tax credits on the individual tax return which can help the owner save on taxes while eliminating double taxation which is common with corporations.  

Limited Liability Companies also have a great deal of flexibility. As it relates to taxes, a Limited Liability Company has the option to decide how it wants to be taxed. It can be taxed liked a partnership, sole proprietorship, or corporation. These options allow a financially savvy owner to pick the tax designation that benefits the LLC the greatest.  Flexibility also relates to the type of owner that LLCs can have. LLC owners can live inside the U.S. but they can also have owners outside the country.

The greatest benefit to creating an LLC is the protection it affords its members. As limited suggests, the owners of LLCs have partial liability. This protection is most notable in the separation of business and personal obligations. Owners are not personally liable for debt obligations incurred by the company.

Additionally, LLCs are popular because they offer businesses a sense of professionalism. Because you must file legal documents and maintain certain government requirements, good-standing LLCs give customers and partners peace of mind when working with your company. LLCs are also easy to set up and run, which makes it one of the most popular business designations in the U.S.

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