What Are LLCs: Everything You Need to Know
The definition of an LLC is a type of business structure where the members of the company aren't personally liable for any debts or liabilities of the company.3 min read
If you've ever wondered, "what are LLCs," the definition of an LLC, or limited liability company, is a type of business structure where the members of the company aren't personally liable for any debts or liabilities of the company. It has many similarities to a corporation, such as having flow-through taxation to the LLC members. When an LLC is run by more than one person, the people involved are known as members.
Introduction to LLCs
There are several advantages to a company forming a limited liability company. Having an LLC protects a company against potential lawsuits, decreases the amount of paperwork that other types of businesses have, makes the company look more credible, and lets the company avoid being taxed twice.
A single-member LLC has one owner, while a multi-member has more than one owner. When a limited liability company is managed by the members, it's known as a member-managed LLC. If a manager is elected to handle the daily operations of the company, the LLC is called a manager-managed LLC. How the company is run will be laid out in the operating agreement. This is the internal agreement that all the limited liability companies agree on.
A limited liability company is only one of a few different types of business structures. Other types include the following:
An S corporation isn't a business structure, but a tax designation. Corporations, LLCs, and partnerships can decide to be taxed as an S corporation. Small companies will enjoy the simplicity and personal liability protection that an LLC offers. It will protect personal assets of the members if the company gets sued. LLCs are easy to maintain and create, and there is no have double taxation.
Advantages of an LLC
LLC owners are protected from the company's lawsuits and debts, with the exception of criminal behavior or fraud. There is also pass-through taxation, which means the company's profits go to its owners, who will then report them on their personal tax returns. Only being taxed once is a huge advantage to having a limited liability company. On the other hand, C corporations can be subject to double taxation.
There are no formal officer roles with LLCs, and they don't need to record company minutes or hold yearly meetings. There are several restrictions on how an LLC can be managed and owned. The LLC can either be owned by one member or multiple members. Creating an operating agreement is recommended for LLCs that have multiple members, as this will decrease the risk of conflict in the future. The company can also choose how it wants to get taxed to see if an S corporation or a C corporation is more beneficial. It also looks more credible being an LLC.
A limited liability company is considered more of a formal business structure than a partnership or a sole proprietorship. The company can start to build credit history once it's formed so it'll be able to access higher loans and bigger lines of credit in the future. Owners do not need to be permanent residents or citizens of the United States.
Disadvantages of an LLC
There are many benefits to having pass-through taxation, but there are also some disadvantages. Since LLCs are pass-through entities, the owners are in charge of paying taxes on their percentage of the LLC. It does not matter if they are given a disbursement or not. All the members of the LLC also need to wait until K-1 tax forms are sent out to finish their taxes, which can delay the process. Many investors will not fund limited liability companies.
Shares of stock can't be issued in order to attract investors. All earnings of the LLC are subject to self-employment tax. There is also tax recognition of assets that are appreciated. This might happen if a company that already exists converts to an LLC. Sometimes there is a limited life of the limited liability company, which means the company won't exist anymore if an owner leaves or dies. These are just several disadvantages to keep in mind.
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