Updated November 25, 2020:

There are many popular LLC companies that business owners can consider when they decide to formalize a business. It is imperative that you know all there is to know about the different business structures before deciding which is best suited for your business.

What is an LLC

An LLC is known as a limited liability company. It is quickly becoming one of the most popular forms of business for new start-ups. This is due to the ease and flexibility of the setup and management offered by this business structure.

LLCs combine pass-through taxation afforded to partnerships and sole proprietorships with the limited liability components of a corporation. This offers the best of both worlds for a business owner. If you opt to form an LLC, you will have a separate business entity that has its own debts and deals with its own legal issues. They are, however, still attached to your personal taxes.

Owners of LLCs are called members. LLCs can have one member or many; it is up to you.

What Types of Businesses Should Choose an LLC?

LLCs are best for businesses that do not plan to raise capital through investors. They are also ideal if you want asset protection and want to have flexibility with regard to management and taxation.

LLCs are ideal for a sole proprietor, partnerships or multi-member corporations. It gives you the same liability protections as it would a corporation without the complex issues required.

Many business owners have determined that LLCs fit their needs best. However, some businesses may not form an LLC. In general, any business that is in the banking, financial, and insurance industries may not file as an LLC.

Some states also place restrictions on certain industries in some states as well. If you’re in California, for instance, you may not form an LLC if you are a healthcare provider, an accountant or an architect.

LLC Advantages

There are a variety of advantages to forming an LLC, including the following:

1.     Liability Protection: LLCs are the only responsible party for the business debt and any liability associated with the business. Members are not held responsible. Their liability is limited to their personal interest that they have invested. Their own personal assets are separate from the LLC.

2.     Pass-Through Taxation: LLCs do not pay taxes on the LLC. All income and losses are passed through to the personal income tax returns of the individual members. LLC taxes are handled similarly to a partnership or sole proprietorship.

3.     No Restrictions on Ownership: LLCs do not have any restrictions regarding residency or citizenship. Foreign nationals may have ownership in LLCs if they like. Other corporate entities can also be LLC members. This means that other corporations and LLCs can be a member of your LLC, or you can be the sole member.

4.     Versatility in Tax Status: The most beneficial parts of LLCs are the ability to choose how the business is taxed. LLCs are federally taxed like a partnership when there is more than one member, or as a sole proprietor when there is one member. However, the LLC can opt to be taxed like a C or S corporation at any point.

5.     Flexible Distribution of Profits: The members can choose how the income or profits of the LLC can be distributed to the members, with many opting to distribute in proportion with the percentage of ownership. This is different than corporations, as they must distribute the profits in accordance with the percentage of ownership of the shareholders.

6.     Few Compliance Requirements: An LLC is not subjected to strict requirements except for annual filing requirements. Corporations are required to hold annual meetings of shareholders and directors, maintain minutes of the meeting, adopt bylaws and the like. This is not a requirement of an LLC. LLCs can choose to have any meetings they want, but they are not required.

LLC Disadvantages

There are some disadvantages you need to consider with regard to LLCs:

1.     Self-Employment Taxes: Even though pass-through taxation is a benefit of an LLC, it can sometimes be a disadvantage. Taxes that are passed through and taxed at the personal level will often be higher than corporate taxes. You also must pay Medicare and Social Security inclusions. It is best to speak to your accountant if you are unsure if this is the best tax choice for you.

2.     Keep Careful Personal Records: You need to be certain to keep accurate records of all your business expenses and keep them separate from your personal financial information. This is the only way you can be sure to have liability protection. You should have different bank accounts for your business expenses so they are easier to track.

If you need help with understanding the different popular LLC companies, 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.