Purpose of an LLC

The purpose of an LLC varies, depending on the reason you want to form your LLC. An LLC is short for limited liability company, and is a beneficial business structure for some businesses, as it provides pass-through taxation and limited liability protection for its owners.

Benefits of the LLC

There are many benefits and purposes of operating an LLC, particularly for certain businesses operating in specific industries, or businesses with certain short-term and long-term goals and objectives. Some of these benefits include:

  • Simple to form
  • Fewer formalities
  • Limited liability
  • Easier to maintain
  • Fewer ongoing requirements
  • Pass-through taxation
  • Reduced taxes

Simple to Form

The LLC business entity is simple to form. Most states only require one document to be submitted to the Secretary of State. This document, usually called the Articles of Organization or Certificate of Formation, is a document that identifies basic business information regarding your business, including:

  • LLC name
  • LLC address
  • Member name(s) and addresses
  • Registered agent name and address
  • Purpose of business, i.e. industry in which you are planning to operate
  • Voting rights and membership percentages

Fewer Formalities

Most states don’t require the LLC to draft an Operating Agreement. While not required, it is highly advantageous to do so. If you fail to file this agreement in a state that requires it, the default rules will apply, which might not be beneficial to you or your business. Therefore, a properly drafted agreement can help prevent legal disputes amongst members or other third parties.

Limited Liability Protection

Another benefit of the LLC is that it provides limited liability protection for all members, meaning that creditors cannot go after the members’ personal assets, whether they are investments, bank accounts, homes, or cars. However, exceptions to this rule do exist, particularly if the member engages in fraud or another illegal act.

Easier to Maintain

LLCs are also easier to maintain than other business structures, especially corporations. Corporations have stricter formalities, as they are required to hire a board of directors, hold periodic meetings, and keep meeting minutes of all meetings that are held. An LLC, however, need not do any of these things. While periodic meetings aren’t required, they are surely beneficial for any business.

Fewer Ongoing Requirements

There are fewer ongoing fees and requirements for maintaining an LLC. Most LLCs aren’t charged state taxes, whereas corporations generally must pay state taxes on an annual basis.

Pass-Through Taxation

LLCs are pass-through tax entities, meaning all profits and losses of the business pass through to the owners who report it on their personal tax returns. C corporations, however, are double taxed –once at the corporate level and again at the personal level if the shareholders are paid dividends. If the LLC is a single-member LLC, then it will be treated as a sole proprietorship in that the sole owner will include all LLC profits, losses, credits, and deductions on his or her personal income tax return.

Reduced Taxation

Multi-member LLCs can elect to be taxed as a corporation or partnership. If they elect to be taxed as a C corporation, there will be a 15% tax rate on the business profits and standard income tax rates for any member earning a salary from the business. If they elect to be taxed as an S corporation, the members will pay taxes in the same way as any ordinary LLC.

If your company begins growing, then you might need to convert from an LLC to a corporation. Keep in mind that each state varies on the requirements for converting your LLC to a corporation. Also keep in mind that not all states recognize single-member LLCs. Therefore, if you are the sole owner of a business and want to register your business, you might be required to have another owner register the business with you.

States can also determine what types of companies can be LLCs. For example, banks and insurance companies cannot operate as LLCs. This is a general rule of thumb across all 50 states. Therefore, before you register your business, you should first check with the Secretary of State’s office to find out if you can in fact operate as an LLC.

If you need help learning about the many benefits and purposes of operating an LLC, or need help forming your LLC, 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.