LLC Ownership Structure: Everything You Need to Know
An LLC ownership structure is just one of the many ways to form a business. Some of the other structures that a company can take include Sole Proprietorship, Partnership, and Nonprofit.3 min read
What Are the Benefits of an LLC Ownership Structure?
An LLC can be more difficult and cost a bit more to create than other business types, but it is a worthwhile investment for many small businesses. For business owners who believe that they are more likely to be sued by customers or have many debts, creating an LLC is a good choice. It also makes sense if they have many personal assets that they do not want creditors to potentially take from them.
The structure of an LLC is a combination of the characteristics that make up a corporation and a partnership/sole proprietorship. The characteristic of limited liability within an LLC is similar to a corporation. However, the component of flow-through taxation is a feature seen in many partnerships.
An LLC gives business owners protection from personal liability for any debts incurred in their business. As mentioned previously, an LLC can be difficult to create; however, it is much smoother to operate than it would be to run a corporation. To create an LLC, articles of organization are required to be filed with the business's state.
Limited Liability in an LLC
If an LLC has any cases of fraud or if any legal requirements have not been fulfilled, then its members' protection from creditors decreases. The creditor can not try to collect this debt by taking any personal possessions from a member, such as a house or a car, but there are some exceptions to protection from having limited personal liability. If a court decides that members of an LLC do not treat it as such, then the court may rule that the LLC does not actually exist, and each member will be personally responsible for any debts.
What Is Required of an LLC to Operate?
In an LLC, members must do the following:
- Tell the truth and act legally. This means that members have to state facts when reporting their finances to creditors, vendors, etc.
- Invest in their LLC. Members must invest enough money into their business for it to pay any expenses and liabilities.
- Keep personal and LLC business separate. Ways that members can do this include obtaining a federal employer identification number and having a business-only checking account that personal finances are kept away from.
- Write an operating agreement. This can be a formal agreement that makes an LLC more credible.
- Obtain liability insurance. This type of policy offers added protection for your personal assets when limited liability cannot. For instance, if a judge rules against your limited liability in court, insurance can also protect the assets of an LLC from any lawsuits or claims.
How Are Taxes Handled in an LLC?
In an LLC, members are not separate from the business for tax purposes, as they are in a corporation. Members report their share of both profits and losses on their personal tax returns. Members must also pay estimated taxes quarterly to the IRS. Co-owned LLCs must file Form 1065 each year with the IRS. This form is an informational return. The form reports on each LLC member's share of profits or losses from the LLC. The IRS reviews this information to make sure that members are reporting their income correctly.
How Is Management Decided in an LLC?
In most small LLCs, the owners are also the managers of the business. This is called member management. Another form of management is manager management, in which someone is designated for managing the LLC. It can either be an owner or someone from the outside of the LLC. The manager of a manager-managed LLC is the only person who gets to make management decisions.
An LLC is a great way for managers to protect their personal assets from being collected for payment of any business debts. It can also be seen as beneficial for tax purposes. An LLC can be difficult to create, but it's also easy to manage for small business owners.
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