What companies are LLC? Know the benefits and features limited liability companies offer for your business.

What Is an LLC?

An LLC, or limited liability company, is a relatively newer form of business. It's a business structure that restricts the liability of its owners to their investment in the company. It's a hybrid entity that brings together the features of a corporation and a partnership business.

An LLC provides legal protection features of a corporation, while keeping taxation and financial formalities to a bare minimum. Just like corporations, LLCs offer the benefit of limited liability to their members, while the pass-through taxation feature is similar to that of general partnerships and sole proprietorships.

LLCs are much more flexible and easier to set up than traditional corporations. They are, however, more formal than partnership firms since you need to file Articles of Organization with the state.

Despite all the attractive features an LLC offers, it has some disadvantages as well:

  • In steep contrast to perpetual existence of corporations, an LLC ceases to exist when any of its members leaves, dies, or becomes bankrupt.
  • An LLC may not be the right type of structure for your business if you intend to expand it into a publicly listed company.
  • Although you can set up almost any new business as an LLC, it's often complicated to convert an existing business into an LLC.

LLCs Offer Protection of a Corporation

The main reason for setting up an LLC structure is to limit the personal liability of owners, also known as members. The creditors of an LLC can't pursue the personal assets of members if the company fails to repay their debts through its own funds and assets.

However, in certain situations, courts may pierce the corporate veil of an LLC and make the owners personally liable. This usually happens when the owners commit a fraud or do not comply with the legal provisions.

LLCs Offer the Flexibility of a Partnership Business

One major difference between an LLC and a partnership firm is that an LLC keeps the company assets separate from the assets of its owners, protecting them from business debts and liabilities. However, the LLC owners include their respective share of company profits in their personal tax returns just like what partners do in the case of a partnership firm.

LLC members can also set off business losses against their personal income, to the extent of their investment. This can be extremely helpful in the initial years of business when the chances of accruing losses are higher.

Although an LLC does not pay taxes separately at the company level, it is required to file an informational tax return with the IRS.

Forming an LLC: Requirements and Considerations

Types of Businesses Allowed

You can form an LLC for almost any type of business except for certain professional partnerships. For example, you can't create an LLC for a law firm or a doctor's office; setting up a limited liability partnership would be the right way to go in such cases.

State Requirements for Forming an LLC

Since LLCs are created by the state, specific requirements for forming an LLC depend upon your state's law. Usually requirements like forms, filing offices, and the minimum number of owners required, vary with the state of formation.

Things to Consider While Forming an LLC

  • Although an LLC offers limited liability protection, it does not provide all the benefits of a corporation. While this may hardly matter for a small business, you may need a full-fledged corporate structure for large businesses with external funding.
  • It can be difficult, and often impossible, to convert an existing business into an LLC. The process usually involves forming a new LLC and transferring the assets to the new entity. Only a few states have legal framework for such conversions.
  • An LLC must have a unique name ending with LLC, Limited Liability Company, or something along similar lines that meets your state's naming requirements.

LLC Benefits for a Start-Up Business

  • It's easy to form an LLC.
  • It keeps your personal assets intact, even if you incur losses in the business.
  • It helps avoid double taxation.
  • It's easy to add new partners and make other structural changes due to minimal administrative formalities.
  • Some states like Delaware and Nevada offer an extremely amenable business environment for LLCs.

Before setting up an LLC, make sure it's the right business structure for your start-up. Seeking professional advice can help you make an informed decision.

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