L.L.C. or LLC: Everything You Need to Know
Whatever the abbreviation, LLCs have become the most popular business entity in the United States, encompassing both large and small businesses.3 min read
2. Understanding the Structure of Limited Liability Companies
3. Who Should Consider Starting an LLC?
4. Advantages to Having an LLC
5. Disadvantages to Having an LLC
6. Managing Your LLC
L.L.C. or LLC stands for “limited liability company.” Whatever the abbreviation, LLCs have become the most popular business entity in the United States, encompassing both large and small businesses. LLCs have become popular largely because of their flexibility and simplicity over other business structures, particularly corporations.
What is an L.L.C. or LLC?
A limited liability company is a type of business structure suitable for new and small businesses. Its perks include pass-through taxation and limited liability, which provides legal protection to your personal assets. Unlike a corporation, LLCs are flexible and much less complex.
Essentially, an LLC offers the best of a sole proprietorship, partnership, and corporation without the drawbacks of each. Plus, when you form an LLC, your business is its own legal entity, keeping your personal and business debts and legal matters separate. As such, owning an LLC protects you from lawsuits, cuts down on paperwork, and prevents double taxation. It also makes your company appear more credible in the community.
However, LLCs are still tied to personal taxes, which is something to consider when choosing a business structure.
Understanding the Structure of Limited Liability Companies
LLCs are owned by one or multiple individuals who are referred to as “members.” One-owner LLCs are called single-member LLCs and multiple-owner LLCs are considered multi-member LLCs.
In general, an LLC is managed by the members, so it's also considered a member-managed entity. In some cases, LLC members may appoint non-member managers to run the business operations, at which point the LLC is considered manager-managed.
How your LLC is set up and operated should be outlined in an internal document known as an operating agreement.
Who Should Consider Starting an LLC?
As an entrepreneur, if you don't plan on raising investment money but you'd like to enjoy a certain amount of asset protection, then starting an LLC might be the right choice.
A few examples of LLC companies include:
- Financial consulting agencies
- Real estate agencies
- Boutique shops
- Personal trainers
- Personal chefs
No matter your business, you might find an LLC is the right business structure that fits your needs.
Keep in mind, however, that some businesses cannot form under an LLC structure. These entities typically include financial companies like banks, insurance agencies, and financial trust companies. Depending on your state, there may also be limits on which industries can form LLCs.
Advantages to Having an LLC
LLCs offer numerous advantages, including:
- Limited liability protections: Only the business is responsible for liabilities and debts, not the members.
- Pass-through taxation: The business does not pay its own taxes, therefore it doesn't pay taxes twice like corporations. Instead, profits are taxed as personal income.
- No ownership restrictions: Individuals and other corporate entities can be LLC members.
- Members can choose how the business is taxed: members may elect S corporation or C corporation taxation if they don't prefer the default tax structure.
- Flexible profit distribution: Members can allocate profits according to each person's stake in the company.
- Minimal compliance requirements: LLCs aren't required to submit annual state filings or participate in other formalities, although an annual meeting is sometimes required.
Disadvantages to Having an LLC
Despite its many advantages, LLCs do have some drawbacks worth consideration:
- Self-employment taxes: Pass-through taxation is a benefit, but not every member likes having to pay self-employment taxes.
- Having to keep precise records: LLC members must maintain a precise record of business expenses separate from personal finances to ensure limited liability.
- Termination: If a member leaves the company, the LLC is typically terminated or ceases to exist.
- Banking requirements: Since you must keep business and personal finances separate, you will need to open a business bank account and submit to the bank's various fees and monthly expenses.
Managing Your LLC
Unlike corporations, LLCs aren't required to have annual meetings or keep minutes. They also aren't subject to strict recordkeeping, giving your business more flexibility. How your LLC is governed all depends on the operating agreement, which is a document created by the LLC members that outlines the company's management structure, ownership details, and other provisions.
Since it's an internal document, you aren't required to file the operating agreement with the state, but you should still take its creation seriously. LLC members have the ultimate authority, meaning that you're responsible for all aspects of your business.
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